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GIVEN:
C = 100 + 0.8Y
ECON 2030
STUDY PROBLEM IN
KEYNESIAN
MACROECONOMICS
I = 50
G = 60; T = 0
Yfe = 1300
GIVEN:
C = 100 + 0.8Y
ECON 2030
STUDY PROBLEM IN
KEYNESIAN
MACROECONOMICS
I = 50
G = 60; T = 0
Yfe = 1300
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.
C
What is the significance of the “100”
in the equation C = 100 + 0.8Y?
People spend “100” on
consumption goods even
when their income is
temporarily zero.
b
a = 100
1
0<b<1
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.
Y
C
Calculate the investment multiplier and
the government spending multiplier.
The spending multipliers
are given by the
expression 1/(1 – b).
b
a = 100
1
1/(1 – b) = 1/(1 – 0.8) = 1/ 0.2 = 5
Y
S,C
Write the saving equation that corresponds
to the given consumption equation.
C = a + bY
C = 100 + 0.8Y
S = -a + (1 – b)Y
b
1
a = 100
S = -100 + 0.2Y
1
1-b
Y
At what income does saving equal zero?
S,C
S = -100 + 0.2Y = 0
C = 100 + 0.8Y
-100 = - 0.2Y
Y = 100/0.2
Y = 500
b
1
a = 100
S = -100 + 0.2Y
1
500
1-b
Y
E
How much is aggregate demand when
income is equal to 1100?
C+I+G
C+I
C
C = 100 + 0.8Y
C = 100 + 0.8(1100)
C = 100 + 880
C = 980
C = 980
a = 100
I = 50
G = 60
C + I + G = 1090
500
Y
E
How much is aggregate demand when
income is equal to 1100?
When Y = 1100
C + I + G = 1090
C+I+G
C+I
C
Y>C+I+G
a = 100
Is the economy in
equilibrium when
income is 1100?
No. There are excess inventories in
the amount of 1100 – 1090 = 10.
500
Y
E
Locate Y = 1100 and Yfe = 1300 relative to
equilibrium income.
C+I+G
C+I
C
When Y = 1100
C + I + G = 1090
Excess inventories = 10
Y>C+I+G
a = 100
G = 60
I = 50
C = 980
500
1100
1300
Y
How do C, F, & O calculate GDP at Y=1100
E
Here’s the
onealternative
way:
way:
C+I+G
C+I
C
GDP = Y
C =+ 1100
I + G + Excess Inv.
GDP = 980 + (50+10) +60
Excess inventories = 10
G = 60
I = 50
a = 100
GDP = 1100
C = 980
500
1100
1300
Y
What is the economy’s equilibrium income?
E
Y=C+I+G
C+I+G
C+I
C
Y = 100 + 0.8Y + 50 + 60
Y – 0.8 Y = 210
Excess inventories = 10
G = 60
I = 50
0.2Y = 210
a = 100
Y = 1050
C = 980
500
1050
1100
1300
Y
E
Describe the market process that brings
about this Keynesian equilibrium.
C+I+G
C+I
C
Excess inventories result in
cutbacks and layoffs.
Y and C spiral
downward.
Excess inventories = 10
a = 100
G = 60
I = 50
C = 980
500
1050
1100
1300
Y
E
Describe the market process that brings
about this Keynesian equilibrium.
C+I+G
C+I
C
Excess inventories result in
cutbacks and layoffs.
Y and C spiral
downward.
a = 100
The spiraling stops
when there are no
longer any excess
inventories and
when Y = C + I + G.
500
1050
1100
1300
Y
a = 100
The demand for labor is
not sufficiently strong to
clear the labor
market at the
W
going wage
rate.
C+I+G
C+I
C
S
Going wage rate
Y= 1050
E
What does the labor market look like when
this Keynesian equilibrium is established?
D
N
500
1050
1300
Y
E
Suppose that the government increases
government spending by 30.
What does this do to
equilibrium income?
C+I+G
C+I
C
Y = 1/(1-b) G
Y = 5 (30)
Y = 150
a = 100
G = 30
Y = 150
500
1050
1200
1300
Y
E
How much more government spending
is required to achieve
full employment?
C+I+G
C+I
C
G = 20
S
W
G = 30
a = 100
Y=
Y = 150
YGoing
= 5wage
Grate
100 = 5 G
D
G = 20
1300
Y = 100
N
500
1050
1200
1300
Y
John Maynard Keynes
1883-1946