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worksheet4

# worksheet4 - Introduction to Macroeconomics Econ 104a,c,d...

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Introduction to Macroeconomics Econ 104a,c,d – Spring 2012 Due 2/24 Worksheet 4 – Keynesian Model of the Economy 1. Consider a closed, simple economy (not necessarily at full employment) with no government, characterized by the following equations, (C is Consumption, PDI is personal disposable Income, and I is Investment): C = 200 + .75(PDI) I = 300 a. Using the Graph below, graph the Consumption Function, Investment, and Aggregate Expenditures. b. On the Graph, label the point where Savings = 0, the point of equilibrium income. Then, derive the values for these using the equations above. PDI = C + S S = 0 Y = C + I PDI = 200 + 0.75PDI Y = 200 + 0.75Y + 300 0.25PDI = 200 0.25Y = 500 PDI = 800 Y = 2000 Savings = 0, Income = __ 800 ___ Equilibrium Income = __ 2000 ___ c. At Equilibrium, how much are consumers saving? Investment? Equilibrium Savings = __300 ___ Equilibrium Investment = __ 300 ___ What is the relationship between these two concepts in the model? S = I. Savings is equal to investment. C + I AE + Y

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d. What happens to equilibrium Income and Savings when Investors get pessimistic and reduce Investment to 200?
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worksheet4 - Introduction to Macroeconomics Econ 104a,c,d...

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