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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.
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 Spring '08
 dolenc
 Macroeconomics

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