1. 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 = 100 + 0.8Y I = 50 G = 60; T = 0 Y fe = 1300 Note that the two marginal propensities sum to one.

2. What is the significance of the “100” in the equation C = 100 + 0.8Y? 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

3. 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

4. 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 = -100 + 0.2Y b 1 a = 100 C = 100 + 0.8Y S,

5. At what income does saving equal zero? C Y b 1 S = -100 + 0.2Y = 0 -100 = - 0.2Y Y = 100/0.2 Y = 500 500 a = 100 C = 100 + 0.8Y 1-b 1 S = -100 + 0.2Y S,

6. How much is aggregate demand when income is equal to 1100? E Y C = 980 I = 50 G = 60 C + I + G = 1090 C = 100 + 0.8Y C = 100 + 0.8(1100) C = 100 + 880 C = 980 a = 100 C C + I C + I + G 500

7. 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

8. Locate Y = 1100 and Y fe = 1300 relative to equilibrium income. E Y When Y = 1100 C + I + G = 1090 Y > C + I + G 11001300 C = 980 I = 50 G = 60 Excess inventories = 10 a = 100 C C + I C + I + G 500

9. What is the economy’s equilibrium income? E Y Y = C + I + G Y = 100 + 0.8Y + 50 + 60 Y – 0.8 Y = 210 0.2Y = 210 Y = 1050 C = 980 I = 50 G = 60 Excess inventories = 10 a = 100 C C + I C + I + G 50011001300 1050

10. Describe the market process that brings about this Keynesian equilibrium. E Y C = 980 I = 50 G = 60 Excess inventories = 10 1050 a = 100 C C + I C + I + G Excess inventories result in cutbacks and layoffs. Y and C spiral downward. 50011001300

11. 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. 50011001300 1050

12. 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. 5001300 1050

13. 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 = 150 12005001300 1050

14. 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 = 20 5001300 1050 1200 W N S D Going wage rate Y = 1300

15. John Maynard Keynes 1883-1946