ECON 3030

1
GIVEN C 100 0.8Y I 50 G 60 T 0 Yfe
1300
ECON 3030 STUDY
PROBLEM IN KEYNESIAN MACROECONOMICS
What is the value of the MPC?
MPC b 0.8
What is the value of the MPS?
MPS 1 - b 0.2
Note that the two marginal propensities sum to
one.
2
What is the significance of the 100 in the
equation C 100 0.8Y?
C
People spend 100 on consumption goods even when
their income is temporarily zero.
Where does the b 0.8 show up on this graph?
b
1
0 gt b gt 1
a 100
The coefficient of Y (symbolized by b and
always between 0 and 1) is the slope of the
consumption equation.
Y
3
Calculate the investment multiplier and the
government spending multiplier.
C
The spending multipliers are given by the
expression 1/(1 b).
b
1
a 100
1/(1 b) 1/(1 0.8) 1/ 0.2 5
Y
4
Write the saving equation that corresponds to the
given consumption equation.
C
S,
C a bY S -a (1 b)Y
C 100 0.8Y
b
1
S -100 0.2Y
a 100
1-b
1
Y
5
At what income does saving equal zero?
C
S,
S -100 0.2Y 0 -100 - 0.2Y Y 100/0.2 Y
500
C 100 0.8Y
b
1
S -100 0.2Y
a 100
1-b
1
Y
500
6
How much is aggregate demand when income is equal
to 1100?
E
C I G
C 100 0.8Y C 100 0.8(1100) C 100
880 C 980
C I
C
C 980 I 50 G 60 C I G 1090
a 100
Y
500
7
How much is aggregate demand when income is equal
to 1100?
E
C I G
When Y 1100 C I G 1090 Y gt C I G
C I
C
Is the economy in equilibrium when income is 1100?
a 100
No. There are excess inventories in the amount of
1100 1090 10.
Y
500
8
Locate Y 1100 and Yfe 1300 relative to
equilibrium income.
E
C I G
When Y 1100 C I G 1090 Y gt C I G
C I
C
Excess inventories 10
G 60
I 50
C 980
a 100
Y
1100
1300
500
9
What is the economys equilibrium income?
E
Y C I G Y 100 0.8Y 50 60 Y 0.8 Y
210 0.2Y 210 Y 1050
C I G
C I
C
Excess inventories 10
G 60
I 50
C 980
a 100
Y
500
1100
1300
1050
10
Describe the market process that brings about
this Keynesian equilibrium.
E
C I G
Excess inventories result in cutbacks and
layoffs.
C I
C
Y and C spiral downward.
Excess inventories 10
G 60
I 50
C 980
a 100
Y
500
1100
1300
1050
11
Describe the market process that brings about
this Keynesian equilibrium.
E
C I G
Excess inventories result in cutbacks and
layoffs.
C I
C
Y and C spiral downward.
The spiraling stops when there are no longer any
excess inventories and when Y C I G.
a 100
Y
500
1100
1300
1050
12
What does the labor market look like when this
Keynesian equilibrium is established?
E
C I G
The demand for labor is not sufficiently strong
to
C I
C
clear the labor market at the going wage rate.
S
W
Going wage rate
Y 1050
a 100
D
N
Y
500
1300
1050
13
Suppose that the government increases government
spending by 30.
E
What does this do to equilibrium income?
C I G
C I
C
?Y 1/(1-b) ?G ?Y 5 (30) ?Y 150
?G 30
a 100
?Y 150
Y
1200
500
1300
1050
14
How much more government spending is required to
achieve
E
full employment?
C I G
C I
C
?G 20
S
W
?Y 5 ?G 100 5 ?G ?G 20
Going wage rate
?G 30
D
Y 1300
a 100
?Y 150
?Y 100
N
Y
500
1300
1200
1050
15
John Maynard Keynes 1883-1946