ECN 102 Keynesian Model: Aggregate Expenditure and Equilibrium Output

What economic event caused a strong rebound in the U.S. economy during 1941-1945?

World War II

What was a Classical economist's interpretation of the rise in output during WWII?

It was a result of a rise in aggregate demand from increased government purchases.

What would a Keynesian economist attribute the rise in output during WWII to?

A surge in aggregate demand due to increased government spending.

Which shock could cause both autonomous consumption (A) and net exports (NX) to fall?

An appreciation of the U.S. dollar.

What is the consumption function given in the Keynesian parameters for 2024?

C = 120 + 0.8*DI

What is the government spending (G) in the Keynesian parameters for 2024?

600

What is the investment (I) amount in the Keynesian parameters for 2024?

300

How is saving (S) calculated in the Keynesian model?

S = DI - C

If wealth in an economy was 10,000 on January 1, 2024, what was the approximate level of wealth on January 1, 2025?

10,400

According to the Classical model, how is employment characterized?

Employment is constant since Y = Y* (full employment) always.

What event can help the U.S. economy return to full employment according to the Keynesian model?

A boom in Japan.

Which shock would NOT increase aggregate demand in the U.S. economy?

None of the above shocks would increase U.S. aggregate demand and output.

What is the marginal propensity to consume (mpc) in the given consumption function?

0.85

What is the tax rate (t) in the Keynesian parameters for 2024?

0.25

What is the net exports (NX) value in the Keynesian parameters for the economy?

-15

What happens to disposable income (DI) when equilibrium output (YEQ) increases?

DI increases because it is a function of YEQ and government transfers.

How does an increase in investment (I) affect equilibrium output (YEQ)?

It increases YEQ due to the multiplier effect.

What is the formula for disposable income (DI) in equilibrium?

DI = (1 - t) * Y + TR

What is the relationship between consumption (C) and disposable income (DI)?

C increases as DI increases, based on the consumption function.

What is the total government transfer (TR) in the Keynesian parameters for 2024?

200

What is the equilibrium output (YEQ) in the Keynesian model?

The level of output where total spending equals total output.

What is the significance of the multiplier effect in Keynesian economics?

It amplifies the impact of initial spending increases on overall economic output.

What does a stock market crash at home signify for autonomous consumption?

It could lead to a decrease in autonomous consumption.

How does consumer pessimism affect net exports (NX)?

It can lead to a decrease in NX as domestic consumption falls.

What is the impact of inflation on disposable income (DI)?

Inflation can erode purchasing power, affecting DI negatively.

What happens if firms produce output equal to YA, which is greater than YEQ?

Inventories will tend to accumulate, the AE line will shift up, and firms may cut prices.

What does the Keynesian model imply about output (Y) compared to full employment (Y*)?

It is possible for output to be below or above full employment.

Which components affect households' take-home pay?

Income (Y), Taxes (T), and Transfer payments (TR).

What was a plausible cause of the U.S. recession of 1991-1992 according to the Keynesian model?

The Gulf War caused a reduction in oil supply, corporate restructuring led to uncertainty, and government debt rose.

What is the equilibrium output (YEQ) based on the given information?

Approximately 9,500.

What shock could take the economy back to full employment level (Y*) if it is 500 above YEQ?

An increase in autonomous consumption (A) by 500.

What was the output (Y) in 2024?

2,700.

What was the output (Y) in 2025?

3,700.

What could explain the growth of output between 2024 and 2025?

Foreign inflation increased or domestic interest rates decreased.

What effect does a stronger U.S. dollar have on U.S. businesses?

It hurts U.S. businesses because it makes U.S. products less competitive in world markets.

What is the formula for consumption (C) in the Keynesian model?

C = 960 + 0.8 * DI.

What is the value of government spending (G) in the Keynesian economy?

1,500.

What is the value of investment (I) in the Keynesian economy?

500.

What is the value of net exports (NX) in the Keynesian economy?

300.

What is the tax rate (t) in the Keynesian economy?

0.2.

What happens when the dollar weakens against foreign currencies?

It can increase exports and improve the competitiveness of U.S. products.

What happens if there is an increase in inflation in a foreign country?

It may lead to increased demand for U.S. exports if domestic inflation remains unchanged.

What is the impact of an increase in the real interest rate (r) in a foreign country?

It could lead to reduced investment in the U.S. if capital flows to the foreign country.

What is the marginal propensity to consume (mpc) in the Keynesian model?

It is the fraction of additional income that households spend on consumption.

What does autonomous expenditure (A) include?

Components such as consumption, investment, and net exports.

What is the role of transfer payments (TR) in household income?

They increase households' disposable income.

What does the Keynesian model suggest about price levels?

Prices may be sticky, leading to short-term fluctuations in output.

What is the significance of the 45-degree line in the Keynesian model?

It represents points where aggregate expenditure equals output.