In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers.
- A large increase in the price of the homes people own.
- Rapid growth in the economy of a major trading partner.
- The development of a major new technology offers profitable opportunities for business.
- The interest rate rises.
- The good imported from a major trading partner become much less expensive.
In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to inflation?
- A tax increase on consumer income.
- A surge in military spending.
- A reduction in taxes for businesses that increase investment.
- A major increase in what the U.S. government spends on healthcare.
Use the AD/AS model to explain how an inflationary gap occurs, beginning from the initial equilibrium in Figure 11.6.
Suppose the U.S. Congress cuts federal government spending in order to balance the Federal budget. Use the AD/AS model to analyze the likely impact on output and employment. Hint: revisit Figure 11.6.
Sketch the aggregate expenditure-output diagram with the recessionary gap.
Sketch the aggregate expenditure-output diagram with an inflationary gap.
An economy has the following characteristics:
Y = National income
Taxes = T = 0.25Y
C = Consumption = 400 + 0.85(Y – T)
I = 300
G = 200
X = 500
M = 0.1(Y – T)
Find the equilibrium for this economy. If potential GDP is 3,500, then what change in government spending is needed to achieve this level? Do this problem two ways. First, plug 3,500 into the equations and solve for G. Second, calculate the multiplier and figure it out that way.
Table 11.8 represents the data behind a Keynesian cross diagram. Assume that the tax rate is 0.4 of national income; the MPC out of the after-tax income is 0.8; investment is $2,000; government spending is $1,000; exports are $2,000 and imports are 0.05 of after-tax income. What is the equilibrium level of output for this economy?
|National Income||After-Tax Income||Consumption||I + G + X||Minus Imports||Aggregate Expenditures|
Explain how the multiplier works. Use an MPC of 80% in an example.
How would a decrease in energy prices affect the Phillips curve?
Does Keynesian economics require government to set controls on prices, wages, or interest rates?
List three practical problems with the Keynesian perspective.