Equilibrium in a Simple Keynesian Model: Numerical Example Suppose that the following parameters...

Question:

Equilibrium in a Simple Keynesian Model: Numerical Example

Suppose that the following parameters apply to an open economy with a government that is running a balanced budget.

Autonomous consumption =$200 billion

Marginal propensity to consume = 0.8

Investment = $50 billion

Taxes (lump sum) =40 billion

Government spending (G) = 40 billion

Exports (X) = 80 billion

Import Function = M = 0.1 Yd

(Recall: Yd = disposable income = Y - T

Answer the following questions:

I. Write an expression for the consumption function (don't forget the taxes!)

2. Write an expression for the aggregate expenditure function.

3. Find equilibrium income.

4. What is the marginal propensity to import?

5. What is the size of the trade deficit/surplus?

Keynesian Economics:

Keynesian economics is all about the aggregate expenditure in the economy and its aftereffects on the economy?s output and the level of inflation. It was developed by the economist John Maynard Keynes and was popularly followed by various economists to understand the great depression and recessions.

Answer and Explanation:

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1.

The equation for consumption function looks like-

{eq}C = autonomous\;consumption + mpc(Income - Tax) {/eq}

Therefore, {eq}C = 200 + 0.8(Y -...

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