PS8 - Problem Set # 8 Solutio ns Chapter 10, #1 a) The...

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Solutions Chapter 10, #1 a) The Keynesian cross graphs an economy’s planned expenditure function, E = C(Y – T) + I + G, and the equilibrium condition that actual expenditure equals planned expenditure. An increase in government purchases from G to G’ shifts the planned expenditure function upward. The new equilibrium is at point β . The change in Y equals the product of the government purchases multiplier and the change in government spending: Y = [1/(1 – MPC)]* G. Because we know that the marginal propensity to consume MPC is less than one, this expression tells us that a one-dollar increase in G leads to an increase in Y that is greater than one dollar. b) An increase in taxes of T reduces disposable income Y – T by T and, therefore, reduces consumption by MPC x T. For any given level of income Y, planned expenditure falls. In the Keynesian cross, the tax increase shifts the planned expenditure function down by MPC x T. β
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PS8 - Problem Set # 8 Solutio ns Chapter 10, #1 a) The...

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