Question

please answer part h to part k

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 *r Government purchases and taxes are both 50. a. Graph consumption as function of income. b.Graph investment as function of the real interest rate. c.Suppose that the real interest rate is 5. Write the equation of the planned expenditure. d.Suppose that the real interest rate is 5. What is the equilibrium level of income? e. Using the equation of the planned expenditure in question c', graph planned expenditure as a function of income. Draw a 45ºdegree line. Show the equilibrium level of income on the Keynesian cross. f.Use the equation of the planned expenditure in question c to answer this question: If government purchases increase to 125, what is the new equilibrium income? g. Calculate the government purchases multiplier. h.Use the equation of the planned expenditure in question c to answer this question: Suppose that the government decides to cut taxes by 25. What is the new equilibrium income? i.Calculate 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 j, 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

1 h) Equation of planned expenditure: AE = C+It be = 150+0.(Y - 25) + 100-10(5) + 50 = 250 +0.77-175 = 2385 +0.7Y, At equilibrium: AE=Y Y = 233.5 +OTY or, 0.37 = 2325 YE 775 1 is the tax multiplier in: AY 775 - 7167 - - 2.332 25 - 50 do Planned expenditure : AE : 150 + 1/( - 50) + (Oo - lo(10)+ 50 = 2O6 + 01 - 35 = 165 HOTY At new equilibrium: r = AE ::: 165 + 0.7Y=7 on, 0.39 = 165 :. Y = 550 k) from (a) and (j) two pair of (0,r) is 71675 550 TO The is were in depicted below:

Interest rate -10 Output 800 500 009 700