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Econ303 Homework Assignment 5 Fall 2014-Use the Keynesian cross to predict the impact on equilibrium GDP..




Question;Econ303;Homework Assignment 5;Fall 2014;Due Thursday November 20;Name;Section;1. Use the Keynesian cross to predict the;impact on equilibrium GDP of the following. In each case;state the direction of the change and give;a formula for the size of the impact.;a. An increase in government purchases.;b. An increase in taxes.;c. Equal-sized increases in both government;purchases and taxes.2. In the Keynesian cross, assume that the consumption;function is given by C = 200 + 0.75 (Y ? T);planned investment is 100, and government;purchases and taxes are both 100.;a. Graph planned expenditure as a function;of income.;b. What is the equilibrium level of income?;c. If government purchases increase to 125;what is the new equilibrium income?;d. What level of government purchases is;needed to achieve an increase in income of 1,600?3. In the development of the;Keynesian cross in the textbook, we assumed that taxes are a fixed;amount. Most countries, however, levy some;taxes that rise automatically with national income.;(Examples in the United States include the;income tax and the payroll tax.) Let?s represent the;tax system by writing tax revenues as;???? =????? +????????;where????? and t are parameters of;the tax code. The parameter t is the marginal tax rate: if;income rises by $1, taxes rise by t ? $1.;a. How does this tax system change the way;consumption responds to changes in GDP?;b. In the Keynesian cross, how does this;tax system alter the government-purchases;multiplier?;c. In the IS ? LM model, how does this tax;system alter the slope of the IS curve?4. The following equations describe an;economy.;???? =???? +???? +????.;???? = 120 +;0.5(?????????).;???? = 100?;10????.;???? = 50.;???? = 40.;????;????;????;=????? 20????.;???? = 600.;???? = 2.;a. Identify each of the variables and;briefly explain their meaning.b. From the above list, use the relevant set of;equations to derive the IS curve. Graph the IS curve;on an appropriately labeled graph.;c. From the above list, use the relevant;set of equations to derive the LM curve. Graph the LM;curve on the same graph you used in part;(b).;d. What are the equilibrium levels of;income and interest rate?5. According to the IS-LM model, what happens in the;short run to the interest rate, income;consumption, and investment under the;following circumstances? Be sure your answer includes;an appropriate graph.;a. The central bank increases the money;supply.;b. The government increases government;purchases.c. The government increases taxes.;d. The government increases government;purchases and taxes by the same amount.


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