Question

QUESTION 3: KEYNESIAN MODEL (7 POINTS)

(You must show all steps of your calculations to get credit for each item of this question; otherwise, you will be deducted marks)

ANSWER THE FOLLOWING QUESTIONS BASED ON THE KEYNESIAN ECONOMY DESCRIBED IN THE TABLE BELOW. ALL FIGURES ARE IN $ BILLIONS.

(2 points) A. Fill in the blanks in this table, making the usual assumptions presented in the Keynesian theory (Chapter 9). All figures are in $ billions.

(1 point) B. Calculate the MPC and MPS (if no calculations shown, I will apply zero points)

(1 point) C. Determine the equilibrium GDP level. Briefly explain how you derived this answer

(1 point) D. If full employment GDP = $450 billion, is the economy in a recessionary or inflationary gap? Explain.

(2 points) E. If Investment expenditures (I) increase by $5 billion, the equilibrium GDP level would (rise/fall) ________ by $_______ billions? Explain.

QUESTION 3: KEYNESIAN MODEL (7 POINTS) (You must show all steps of your calculations to get credit for each item of this question: otherwise, you will be deducted marks) ANSWER THE FOLLOWING QUESTIONS BASED ON THE KEYNESIAN ECONOMY DESCRIBED IN THE TABLE BELOW. ALL FIGURES ARE IN $ BILLIONS. (2 points) A. Fill in the blanks in this table, making the usual assumptions presented in the Keynesian theory (Chapter 9). All figures are in $ billions. DPI GDP т 5 (X-M) TPE (Disposable Income) 325 Unplanned Inventory Changes 300 50 30 -15 30 350 375 400 425 450 475 (1 point) B. Calculate the MPC and MPS (if no calculations shown, I will apply zero points)

Answer 1

4Dp Onplanned Inventory Cris la 1(x-M THE 300 350 375 400 320 405 425 450 340 360 380 400 445 175 465 +10 - 15 475 Tax = GDP - DI S=10I-C TPE = C+I+G+ (x- onplanned inventory - PPEFODP ADP- TPE MPC e ec - 20 - 5 = 0.6 MPS = os = 5 = 0.2 B. C. Equilibaiom GDP, GDP = Total planned expenditure i GDP * = $425 billion

D. If full employment ADP = $ 450 billion, Recession = full embloyment - Equilibrium GDP - 450- 425 - $25 billion. Recessionary hap & hap Multiplier . Multiplier Multiplier = be - od 1 02 MPS Recessionary hap - 25 = $5 billion. Investment Multiplier = ΔΙ MPS sy - od 5 sy DI (APS) Dy = 5x5 = $25 billion. i. If investment expenditure increases by $5 billion, then equilibrium GDP will increase by $25 billion.