Question

2. Chapter 11, The Keynesian Cross (5 points): • In the Keynesian cross, assume that the consumption function is given by: C = 200 +0.75(Y - T) Planned investment is 100, government purchases and taxes are both 100. (a) Graph planned expenditure as a function of income. (b) What is the equilibrium level of income? (c) If government purchases increase to 125, what is the new equilibrium income? (d) What level of government purchases is needed to achieve an income of 1,600? 3. Chapter 11, The Theory of Liquidity Preference (5 points): • Suppose that the money demand function is: (M/P)' = 1,000 - 100r, where r is the interest rate in percent. The money supply, M is 1,000 and the price level, P, is 2. (a) Graph the supply and demand for real money balances. (b) What is the equilibrium interest rate? (c) Assume that the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200? (d) If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?

Answer 1

- E = (41th y= 200+ 6.7569-700) 4100 + 100 y = 0oto 75 (y-100) + 200 + 100 Incom Y = 200 to 7524-100) + loo tuo Y - 300+ 0.751-75 Y = 225 +0.75% 0.25% = 225 y=225 0.25 y = 900 mulliplier = tmpe ( = 1 0. 25 = 4 Change in Income = = ly=$1000 4+25 100 (d) Shortage = 1600-1000 = 600 change in expenditure Required = 600 A [150]