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Chapter 11 Homework. Number 1: Lauren Number 4: Travis Number 8: Stephanie Number 14: Nicole Alternate: Kelly. Chapter 12 homework (due Monday). Numbers 5, 10, 13, and 15. Appendix for Chapter 12. The Keynesian Cross. The Keynesian Cross.

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chapter 11 homework
Chapter 11 Homework
  • Number 1: Lauren
  • Number 4: Travis
  • Number 8: Stephanie
  • Number 14: Nicole
  • Alternate: Kelly
chapter 12 homework due monday
Chapter 12 homework (due Monday)
  • Numbers 5, 10, 13, and 15
appendix for chapter 12

Appendix for Chapter 12

The Keynesian Cross

the keynesian cross
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.
consumption
Consumption
  • 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.

the 45 degree line
The 45-Degree Line
  • 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.
investment
Investment
  • The investment function shows the relationship between planned investment and income in the economy:
  • Investment is independent of income.
the aggregate demand function in a world with government and trade
The Aggregate Demand Function in a World with Government and Trade
  • To complete the model, we assume that both government spending and net exports are exogenous.
    • That is, they are determined by outside factors.
the aggregate demand function in a world with government and trade cont d
The Aggregate Demand Function in a World with Government and Trade (cont’d)
  • We can now add all of the components of aggregate demand to get the overall aggregate demand function.
the keynesian cross and overall macroeconomic equilibrium
The Keynesian Cross and Overall Macroeconomic Equilibrium
  • 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
the keynesian cross and overall macroeconomic equilibrium cont d
The Keynesian Cross and Overall Macroeconomic Equilibrium (cont’d)
  • 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.
can we do it number 5
Can we do it? (number 5)
  • 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
chapter 12 appendix homework
Chapter 12 Appendix Homework
  • Numbers 1, 2, and 6
chapter 13

Chapter 13

Fiscal Policy

the goals of fiscal policy
The Goals of 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.
expansionary fiscal policy
Expansionary Fiscal Policy
  • Increased government spending
  • Decreased taxes
    • To increase AD and real GDP.
expansionary fiscal policy1
Expansionary Fiscal Policy
  • 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
the multiplier principle
The Multiplier Principle
  • 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.
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