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Homework answers / question archive / Florida Atlantic University ECO 3203 Chapter 11 1)In the Keynesian cross model, assume that the consumption function is given by C = 120 + 0
Florida Atlantic University
ECO 3203
Chapter 11
1)In the Keynesian cross model, assume that the consumption function is given by C = 120 + 0.8 (Y-T). Planned investment is 200; government purchases and taxes are both 400.
a. C= 120 + 0.8 (Y-T)
b. Y = 400 +0.8Y 0.2Y = 400
2400 - 2000 = required change in government spending x 1 / 1-MPC 400 = required change in government spending x 1 / 1 - 0.8
400 = required change in government spending x 1 / 0.2 Required change in government spending =
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400 = 800 – 50r
400 = 50r
r = 400/50 = 8
Therefore so the equilibrium interest rate 8%
300 = 500 – 5r
500 = 50r
r = 500/50 = 10
When the money supply is reduced from 2000 to 1500 the equilibrium interest rate increases from 8% to 10%.
M/P = 800 – 50r
In this model the price level is fixed at 5 therefore:
M/5 = 800 – 50(4)
M/5 = 800 – 200
M/5 = 600
M = 600 * 5
Therefore if the central bank wants the interest rate to be 4% the money supply should be set at 3,000.
Y = C + I + G
= 50 + 0.75(Y-200) + 150 – 10r +250
Then we assume equilibrium between money demanded and money supplied:
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1)Consider the Economy Hicksonia
Y = C + I + G
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