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Chapter 11 Homework

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- Number 1: Lauren
- Number 4: Travis
- Number 8: Stephanie
- Number 14: Nicole
- Alternate: Kelly

- Numbers 5, 10, 13, and 15

Appendix for Chapter 12

The Keynesian Cross

- The Keynesian Cross is a model of the economy that focuses on the relationship between aggregate demand and income to determine equilibrium.

- The relationship between income and consumption is given by the consumption function:
Where:

c0represents autonomous consumption, consumption that is independent of income.

c′is the marginal propensity to consume.

y is income.

- We gain additional insight into the consumption function when we compare it to a 45-degree reference line.
- At all points along this line, consumption and income are equal.

- The investment function shows the relationship between planned investment and income in the economy:
- Investment is independent of income.

- To complete the model, we assume that both government spending and net exports are exogenous.
- That is, they are determined by outside factors.

- We can now add all of the components of aggregate demand to get the overall aggregate demand function.

- The 45-degree line is interpreted as the aggregate supply function for the economy.
- Everywhere along that line, total production equals total demand.

- Equilibrium occurs where the aggregate demand function intersects the aggregate supply function.
- The Keynesian Cross

- Suppose that net exports increase.
- The aggregate demand function would shift up.
- Aggregate demand now exceeds aggregate supply, so inventories fall.
- As inventories fall, firms increase output.
- Increased production leads to increased income and consumption.
- Real GDP ultimately increases by a multiplied amount.

- If the consumption function is $100+0.5y, the investment function =$80, the government spending function = $200, and the net export function = $10, what would be the amount of aggregate expenditures be if income were $1000, $2000, and $3000?
- AE=C+I+G+(X-M)
- 890
- 1390
- 1890

- Numbers 1, 2, and 6

Chapter 13

Fiscal Policy

- Intentional use of the government’s power to tax and spend to alter AD and quickly achieve the full employment level of output.
- Goals are to correct either:
- An underperforming economy, or
- An overheating economy.

- Increased government spending
- Decreased taxes
- To increase AD and real GDP.

- As a result:
- AD increases.
- If increases by the “right amount”, full employment level of output will be met

- Price level increases.
- Unemployment rate falls.
- Real GDP increases

- AD increases.

- Changes in any component of AD will lead to a magnified change in the level of real income in the economy.
- Gives policy makers a tool to determine the correct change in AD needed to close a recessionary or expansionary gap.