Problem set 9 sheet PDF

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Econ 162-A1, A2 Fall 2019

Kenny Christianson due: November 22 PROBLEM SET NUMBER NINE

1. In the fixed-price Keynesian model, why can’t the MPC be equal to 1? 2. Assume the following Keynesian model: AE = C + I + G + (X - M) C = 600 + .8Y I = 800 G = 400 (X - M) = 200 T=0 a. Find the aggregate expenditure function and the equilibrium level of GDP. b. Using a “Keynesian cross” (or 45-degree line) diagram, show graphically the equilibrium in part a). c. What is the spending multiplier in this model? d. If government spending increases by $100, find the new equilibrium level of GDP. Show graphically. 3. Go to the following link to read Franklin Roosevelt’s fireside chat of April 14, 1938: http://www.presidency.ucsb.edu/ws/index.php?pid=15628 After reading the chat, answer the following questions: a. Use the terminology of the fixed-price Keynesian model to summarize the arguments made in paragraphs 9-14. (“I then said this to the Congress:….) b. Use the terminology of the fixed-price Keynesian model to explain the proposed remedies listed in paragraphs 25-39. ("How and where can and should the Government help to start an upward spiral?"…)

c. What macroeconomic concept is expressed in paragraph 46? (It is going to cost something to get out of this recession this way…)

d. What macroeconomic concept is expressed in paragraph 49? (No doubt you will be told that the Government spending program …)

Econ 162-A1, A2

Fall 2019

Problem Set 9

2

4. Assume you are given the following information for the economy of Macroland: GDP 0 500 1000 1500 2000 2500 3000 3500 4000 a. b. c. d.

C 200 600 1000 ____ 1800 2200 2600 ____ 3400

S

I

_____ _____ _____ 200 _____ _____ _____ _____ _____ 200 _____ 200 _____ 200 _____ 200 _____ 200

G

(X – M)

AE

_____ 100 _____ _____ 100 100 100 100 100

0 0 0 0 0 0 0 0 0

_____ _____ _____ _____ _____ _____ _____ _____ _____

What is the MPC in this model? The MPS? Fill in the blanks in the table above. What is the level of equilibrium GDP? How do you know? If investment spending increases by $100, what is the new level of equilibrium GDP?

5. Assume a model with a Keynesian aggregate demand curve and an ordinary upwardsloping aggregate supply curve. Using this model, please show the effects of the following events. Describe what happens to the price level and real GDP. a. deflation. b. an increase in labor costs due to increases in nominal wages. c. an increase in household wealth. d. a decrease in the value of the dollar compared to other currencies. 6. SOOT Survey The SOOT (Student Opinion Of Teaching) surveys are available on line. To access the SOOT survey for this course, go to the mycourses.binghamton.edu page. On the home page there is a tools box. In the tools box on the left, click on SOOT Survey to complete the surveys. The results are anonymous, and I will only see the aggregated results. Thank you for your feedback....