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Chapter 11 Homework

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Title: Chapter 11 Homework


1
Chapter 11 Homework
  • Number 1 Lauren
  • Number 4 Travis
  • Number 8 Stephanie
  • Number 14 Nicole
  • Alternate Kelly

2

3
Chapter 12 homework (due Monday)
  • Numbers 5, 10, 13, and 15

4
Appendix for Chapter 12
  • The Keynesian Cross

5
The Keynesian Cross
  • The Keynesian Cross is a model of the economy
    that focuses on the relationship between
    aggregate demand and income to determine
    equilibrium.

6
Consumption
  • The relationship between income and consumption
    is given by the consumption function
  • Where
  • c0 represents autonomous consumption,
    consumption that is independent of income.
  • c' is the marginal propensity to consume.
  • y is income.

7
Figure A12.1 The Consumption Function
8
The 45-Degree Line
  • We gain additional insight into the consumption
    function when we compare it to a 45-degree
    reference line.
  • At all points along this line, consumption and
    income are equal.

9
Figure A12.2(a) The 45-degree Line and the
Consumption Function
10
Figure A12.2(b) The 45-degree Line and the
Consumption Function
11
Investment
  • The investment function shows the relationship
    between planned investment and income in the
    economy
  • Investment is independent of income.

12
Figure A12.3 Adding the Investment Function to
Aggregate Demand
13
The Aggregate Demand Function in a World with
Government and Trade
  • To complete the model, we assume that both
    government spending and net exports are
    exogenous.
  • That is, they are determined by outside factors.

14
The Aggregate Demand Function in a World with
Government and Trade (contd)
  • We can now add all of the components of aggregate
    demand to get the overall aggregate demand
    function.

15
Figure A12.4 Adding Government Expenditures and
Net Exports to the Aggregate Demand Function
16
The Keynesian Cross and Overall Macroeconomic
Equilibrium
  • The 45-degree line is interpreted as the
    aggregate supply function for the economy.
  • Everywhere along that line, total production
    equals total demand.
  • Equilibrium occurs where the aggregate demand
    function intersects the aggregate supply
    function.
  • The Keynesian Cross

17
Figure A12.5 Equilibrium in the Keynesian Cross
Model
18
The Keynesian Cross and Overall Macroeconomic
Equilibrium (contd)
  • Suppose that net exports increase.
  • The aggregate demand function would shift up.
  • Aggregate demand now exceeds aggregate supply, so
    inventories fall.
  • As inventories fall, firms increase output.
  • Increased production leads to increased income
    and consumption.
  • Real GDP ultimately increases by a multiplied
    amount.

19
Figure A12.6 The Impact of an Increase in Net
Exports
20
Can we do it? (number 5)
  • If the consumption function is 1000.5y, the
    investment function 80, the government spending
    function 200, and the net export function
    10, what would be the amount of aggregate
    expenditures be if income were 1000, 2000, and
    3000?
  • AECIG(X-M)
  • 890
  • 1390
  • 1890

21
Chapter 12 Appendix Homework
  • Numbers 1, 2, and 6

22
Chapter 13
  • Fiscal Policy

23
The Goals of Fiscal Policy
  • Intentional use of the governments power to tax
    and spend to alter AD and quickly achieve the
    full employment level of output.
  • Goals are to correct either
  • An underperforming economy, or
  • An overheating economy.

24
Expansionary Fiscal Policy
  • Increased government spending
  • Decreased taxes
  • To increase AD and real GDP.

25
Figure 13.1 Curing the Underperforming Economy
with Expansionary Fiscal Policy
26
Expansionary Fiscal Policy
  • As a result
  • AD increases.
  • If increases by the right amount, full
    employment level of output will be met
  • Price level increases.
  • Unemployment rate falls.
  • Real GDP increases

27
The Multiplier Principle
  • Changes in any component of AD will lead to a
    magnified change in the level of real income in
    the economy.
  • Gives policy makers a tool to determine the
    correct change in AD needed to close a
    recessionary or expansionary gap.
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