List 6: Keynesian cross: aggregated demand and supply. Various kinds of multipliers.
Task 1.
Use the Keynesian cross to predict the impact of:
a) An increase in government purchases
b) An increase in taxes
c) An equal increase in government purchases and taxes.
Task 2.
In the Keynesian cross, assume that the consumption function is given by: C = 200 + 0.75 (Y-T)
Planned investment is 100, 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 income of 1600?
Task 3.
The economy is described by the following equations: Y=C+I, C=Ca+MPC * Y.
The autonomic consumption and investments and equal: Ca=200, I=200, and marginal propensity to
consume is MPC = 0,6.
 What is the equilibrium income?
 How much will the equilibrium income change, if the investments decrease by ∆I= -52 (hint:
compute the investment multiplier)?
Task 4.
Suppose that the consumer saves every 30% of his income. Tax rate is 20%. G=500 and I = 400. Calculate:
1) Equilibrium income
2) Level of disposable income
3) Consumption
4) New equilibrium income, if the investments increase by 40
5) New level of disposable income and consumption.
Task 5.
Suppose that MPC = 0,7 and tax rate t=0,1. Moreover Government purchases are G=900, and investments
are I=1600. Compute:
a) Equilibrium income
b) Government purchases multiplier
c) What will the new equilibrium income be, if G=700?
d) How will the consumption change, if the autonomic consumption is Ca=100
e) How must the investments change, to increase the equilibrium income by 1300?
Task 6.
The open economy is given by the following equation: Y= Ca+MPC (Y-tY)+I+G+Xa-MPI*Y, Ca=100, I=100,
G=100, Xa=60 (autonomic part of net export), MPC = 0,8, MPI=0,2 (marginal propensity to import), t=0,25.
Compute:
 Equilibrium income
 What is the value of the export multiplier?
Macroeconomics
Dr Anna Kowalska-Pyzalska
List 6: Keynesian cross: aggregated demand and supply. Various kinds of multipliers.
Task 7.
Fill in the table, if:
 planned consumption is equal to 70% of disposable income;
 government introduces net taxes (difference between transfers and direct taxes) equal to 20% of
income;
 planned investments = 60
 planned government purchases are equal to 50
Compute:
a) consumption, savings and net taxes for each level of income.
b) Aggregated demand for each level of aggregated supply
c) If the income is equal to 350, how will the producers react?
d) What is the equilibrium level of income?
e) What is the budget deficit by the equilibrium income?
f) Suppose that government purchases have increased by 22. What will the new equilibrium income be?
What is the budget deficit now? What is the value of the government purchases multiplier?
Y:
Income
(production)
50
100
150
200
250
300
350
400
Y-T:
Disposable
income
C:
I:
G:
consumption investments government
purchases
Macroeconomics
Dr Anna Kowalska-Pyzalska
S:
savings
NT:
net
taxes
AD:
aggregated
demand