Chapter 11 Homework

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# Chapter 11 Homework - PowerPoint PPT Presentation

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
• 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
• The Keynesian Cross is a model of the economy that focuses on the relationship between aggregate demand and income to determine equilibrium.
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
• 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
• 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 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
• 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)
• 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
• Numbers 1, 2, and 6

### Chapter 13

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
• Increased government spending
• Decreased taxes
• To increase AD and real GDP.
Expansionary Fiscal Policy
• As a result: