Question

Keynes Graph Question

The Keynesian economy (billions of dollars) is described in the table below. Use Keynes' model and assumptions to fill in all the missing cells and answer the questions below Unplanned GDP Тах DPI C S G X ТРЕ A Inventory 250 210 20 40 30 10 300 40 350 Equilibrium GDP (GDP) is 400 250 300 350 400 MPC is C0.6 C0.75 C0.8 C0.5 The expenditure multiplier is- 4.0 5.0 2.0 2.5 If full employment GDP (GDP) 250, what type of gap is the economy experiencing? Cinflationary stagnant Klein Crecessionary by To eliminate the gap, government expenditures (G) must inorease Finish attempt ous page decrease Ch. 6 Powerpoint

Answer 1

GDP	Tax	DPI= GDP-Tax	C=DPI-S	S	I	G	X	TPE=C+I+G+X	Unplanned $\Delta$ Inventory= GDP-TPE
250	40	210	190	20	40	30	10	270	-20
300	40	260	220	40	40	30	10	300	0
350	40	310	250	60	40	30	10	330	20
400	40	360	280	80	40	30	10	360	40

Because Savings increases by 20 , so it would continually increases by 20 and because of that C increases 30 , so it continually increases by 30.

1. Equilibrium GDP is where TPE =GDP , so it is 300. Hence,option(B) is correct.

2. MPC = (Change in C/Change in DPI) = (30/50)= 0.6. Hence,option(B) is correct.

3. The expenditure multiplier = 1/1-MPC = 1/1-0.6 = 1/0.4 = 2.5. Hence, option(B) is correct.

4. If full employment GDP is 250 , then there inflationary gap because equilibrium GDP is greater than full employment GDP. Hence,option(C) is correct.

Because equilibrium GDP = 300 , so there is a gap of 50. To eliminate the gap , the government expenditures must increase by (50)(1-MPC) = (50)(0.4)=20.