In the Keynesian cross, assume that the consumption function is given by: C=200+

Question

In the Keynesian cross, assume that the consumption function is given by: C=200+0.75 (Y-T). PLanned investment is 100, government purchases and taxes are both 100.

a. Graph planned expenditure as a fraction of income.
b. What is the equilibrium level of income?
c. If government purchases increase to 125, what is the new equilibrium income?
d. What level of government purchases is needed to achieve an income of 1600?

Explanation / Answer

B) Closed economy, simple Keynesian cross. G=T=100 I=100 C=200+0.75 (Y-T) = 200+0.75Y-75 = 125-0.75Y Y = C+I+G = 125 + 0.75Y + 100 + 100 = 325+0.75Y Y=325+0.75Y 0.25Y=325 Y = 325/0.25 Y=1'300 C) Y=(325+25) / 0.25 = 350/0.25 = 1'400 (Budget deficit G>T) D) Y = 1'600 X/0.25 = 1'600 X = 1'600 * 0.25 = 400 400-325 = +75 ?G=+75 G=100+75 = 175 (Budget deficit G>T)

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