Question

Question 2 In the Keynesian cross, assume that the consumption function is given by c-150+0.7(Y-T Planned investment is: I-100-10 Govemment purchases and taxes are both so. Graph consumption as function of income a b. Graph investment as function of the real interest rate. Suppose that the real interest rate is 5. Write the cquation of the planned expenditure. d. Suppose that the real interest rate is 5. What is the equilibeium level of income? Using the oquation of the plannod expenditure in 'question e'. graph planned expenditure as a function of income. Draw a 45 degree line. Show the equilibeium level of income on the Ксупеsian cross. Use the quation of the planaed expediture in question e to answer this question: If government purchases increase to 125, what is the new equilibrium income? gCalculate the govermment purchases multiplier. h that the government decides to cut taxes by 25. What is the new equilibrium income? Use the cquation of the planned expenditure in question e to answer this question: Suppose iCakulate the tax multiplier Suppose that the real interest rate increases to 10. Write the new equation of the planned expenditure. Calculate the new equilibrium level of income. k. From questions d and i, we get two combinations of real interest rate and income at which the goods market is in equilibrium. Plot the IS curve by using these two combinations of real interest rate and income.

Answer 1

(a)

C = 150 + 0.7(Y - 50) = 150 + 0.7Y - 35 = 115 + 0.7Y

Data table used:

Y	Consumption
0	115
50	150
100	185
150	220
200	255
250	290
300	325
350	360
400	395
450	430
500	465

Graph:

(b)

I = 100 - 10r

Data table:

r	I
0	100
1	90
2	80
3	70
4	60
5	50
6	40
7	30
8	20
9	10
10	0

Graph:

(c)

When r = 5, I = 100 - 5 x 10 = 100 - 50 = 50

Planned expenditure (PAE) = C + I + G

PAE = 115 + 0.7Y + 50 + 50

PAE = 215 + 0.7Y

(d)

In equilibrium, Y = PAE.

Y = 215 + 0.7Y

0.3Y = 215

Y = 716.67

NOTE: As HOMEWORKLIB Answering Policy, 1st 4 parts have been answered.