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 GIVEN: C.

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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 GIVEN: C = Y I = 50 G = 60; T = 0 Y fe = 1300 Note that the two marginal propensities sum to one.

What is the significance of the “100” in the equation C = Y? a = 100 C Y People spend “100” on consumption goods even when their income is temporarily zero. Where does the b = 0.8 show up on this graph? The coefficient of Y (symbolized by “b” and always between 0 and 1) is the slope of the consumption equation. b 1 0 > b > 1

Calculate the investment multiplier and the government spending multiplier. C Y The spending multipliers are given by the expression 1/(1 – b). 1/(1 – b) = 1/(1 – 0.8) = 1/ 0.2 = 5 a = 100 b 1

Write the saving equation that corresponds to the given consumption equation. C Y C = a + bY S = -a + (1 – b)Y 1-b 1 S = Y b 1 a = 100 C = Y S,

At what income does saving equal zero? C Y b 1 S = Y = = - 0.2Y Y = 100/0.2 Y = a = 100 C = Y 1-b 1 S = Y S,

How much is aggregate demand when income is equal to 1100? E Y C = 980 I = 50 G = 60 C + I + G = 1090 C = Y C = (1100) C = C = 980 a = 100 C C + I C + I + G 500

How much is aggregate demand when income is equal to 1100? E Y When Y = 1100 C + I + G = 1090 Y > C + I + G Is the economy in equilibrium when income is 1100? No. There are excess inventories in the amount of 1100 – 1090 = 10. a = 100 C C + I C + I + G 500

Locate Y = 1100 and Y fe = 1300 relative to equilibrium income. E Y When Y = 1100 C + I + G = 1090 Y > C + I + G C = 980 I = 50 G = 60 Excess inventories = 10 a = 100 C C + I C + I + G 500

What is the economy’s equilibrium income? E Y Y = C + I + G Y = Y Y – 0.8 Y = Y = 210 Y = 1050 C = 980 I = 50 G = 60 Excess inventories = 10 a = 100 C C + I C + I + G

Describe the market process that brings about this Keynesian equilibrium. E Y C = 980 I = 50 G = 60 Excess inventories = a = 100 C C + I C + I + G Excess inventories result in cutbacks and layoffs. Y and C spiral downward

Describe the market process that brings about this Keynesian equilibrium. E Y a = 100 C C + I C + I + G Excess inventories result in cutbacks and layoffs. Y and C spiral downward. The spiraling stops when there are no longer any excess inventories and when Y = C + I + G

What does the labor market look like when this Keynesian equilibrium is established? E Y a = 100 C C + I C + I + G The demand for labor is not sufficiently strong to W N S D Going wage rate Y= 1050 clear the labor market at the going wage rate

Suppose that the government increases government spending by 30. E Y a = 100 C C + I C + I + G  G = 30 What does this do to equilibrium income?  Y = 150  Y = 1/(1-b)  G  Y = 5 (30)  Y =

How much more government spending is required to achieve E Y a = 100 C C + I C + I + G  G = 30  Y = 150  Y = 5  G 100 = 5  G  G = 20 full employment?  Y = 100  G = W N S D Going wage rate Y = 1300

John Maynard Keynes