Y = 71; :5Y (1 0:5)Y = 71; 500 0:5Y = 71; 500 Y = 143; 000. Note that you can get the same result if you use the formula

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1 Basic Keynesian Model (Chapter 0): () C 4; :5(Y T ) since Y D Y T T 5; 000; I P 55; 000; G 20; 000 NX T otal Exports T otal Im ports 5; ; 000 5; 000 AE C+I P +G+NX 4; 000+0:5(Y 5; 000)+55; ; 000 5; 000 AE 74; :5Y 2; 500 7; :5Y (2) Solution! Y AE Y 7; :5Y ( 0:5)Y 7; 500 0:5Y 7; 500 Y 43; 000 Note that you can get the same result if you use the formula Y a bt + IP + G + NX b Y 4; 000 (0:5 5; 000) + 55; ; 000 5; 000 0:5 Y 43; 000 (3) Expenditure Multiplier is given by, Expenditure M ultiplier MP C 0:5 2 Expenditure Multiplier is the amount by which real GDP chamges as a result of a $ change in autonomous consumption, investment spending, government purchases or net exports.

2 (4) GDP MP C G. Here change in government purchases is positive (there is an increase by 5,000). G 25; ; 000 5; 000: Thus GDP 2 5; 000 0; 000 So change in real GDP is 0,000 or equilibrium real GDP increases by 0,000. To see a good example that shows the change in real GDP (due to an increase in spending) in a Keynesian Cross Diagram, refer to Figure on page 268 in your textbook. Only numbers are di erent. (5) First calculate the tax multiplier. Note that it is one minus the expenditure multiplier or But you can nd it from the usual formula, T ax Multiplier MP C MP C 0:5 0:5 Change in net taxes T 0; 000 5; 000 5; 000 GDP T 5; 000 5; 000 So real GDP decreases by 5,000, new equilibrium GDP 43,000-5,000 38,000 (6) Exogenous variables are a (autonomous consumption), b (marginal propensity to consume), T (net taxes), I P (planned investment), G (government purchases) and NX (net exports). C (consumption) is not exogenous because it changes when Y (real GDP or real income) changes. 2

3 Questions from Chapter 7: ) Remember that, GDP from expenditure side can be found by, GDP C + I + G + NX (Exports Im ports) GDP $3:5 trillion + $2:2 trillion + $3 trillion + $: trillion $: trillion GDP $8:7 trillion 2) Total leakages equal to household savings plus net taxes T otal Leakages S + T $2:5 trillion + $2:7 trillion $5:2 trillion Note that total injections are planned investment plus government purchases T otal Injections I P + G $2:2 trillion + $3 trillion $5:2 trillion 3) If government runs a budget de cit G T > 0; if government runs a budget surplus T G > 0: Here government runs a budget de cit. G T $3 trillion $2:7 trillion $0:3 trillion 4) Total amount of funds demanded equals planned investment plus the amount of government s budget de cit (if government runs a budget de cit). Note that here government is running a budget de cit. T otal amount of funds demanded I P + G T $2:2 trillion + $0:3 trillion $2:5 trillion 3

4 Chapter 8: ) You have seen this in chapter 7 as well. The gure shows the situation of loanable funds market after an increase in government purchases by $200 billion or a decrease in net taxes by $200 billion (demand for loanable funds curve shifts rightward). Investment spending or planned investment will decrease by $00 billion. Note that this is an example of complete crowding out. For example, if the cause of the increase in budget de cit is due to an increase in government purchases, the amount of increase in government purchases equals to the amount of decrease in planned investment plus the amount of decrease in consumption spending. G " I P # + C # $200 billion $00 billion + $00 billion Chapter 0: ) Autonomous consumption (a) is the amount of consumption when disposable income is zero. So from the table, a $00. 2) MPC (marginal propensity to consume) is the slope of the consumption function. Below YD is disposable income. MP C C Y D 2; 000 ; 500 2; 000 ; 000 0:5 Chapter : ) M Cash in hand + Checking deposits + Travelers checks M $00 billion +$300 billion + $25 billion $425 billion M2 M + Saving-type accounts + Money market mutual funds (MMMFs)+ Small-time deposits M2 $425 billion + $750 billion + $600 billion +$650 billion $2,425 billion 4

5 2) RRR From the formula of RRR, RRR 0:20 Required Reserves Demand Deposits Required Reserves $50 million Then required reserves equals $0 million. Note that total reserves of the bank equals $20 million, Reserves Cash in vault + Accounts with the Fed $5 million + $5 million $20 million The bank is meeting its reserve requirements and has excess reserves of $0 million. Excess reserves Reserves - Required Reserves 3) Demand deposit multiplier is RRR Money Supply Demand Deposits RRR Reserves 0. $2,000 0 $2,000 $20,000 Eventually $20,000 will be created (or money supply increases by $20,000). 5