1.Essentials of the Basic Keynesian Model
A consumption function is given by C = 200 + 0.8 Y, where C is consumption spending and Y is income.
a. What is the value of the marginal propensity to consume? And of the marginal propensity to save?
b. For each of the following values of Y, find C: 0, 500, 1000, and 5000.
c. If Y is 0, how is it possible (in reality) for C to be greater than zero?
d. Why do people save part of their income? [Suggest a few reasons.]
e. For each of the following pairs, indicate who is likely to save more (other things being equal), and briefly justify your choice:
– A college student vs. a salaried employee in their 40s.
– A retiree vs. a salaried employee in their 40s.
– A farmer (with an uneven income stream) vs. a government employee (with a predictable income stream).
– Someone in a country that provides social security pensions vs. someone in a country that does not.
– Someone who grew up poor vs. someone who grew up in a well-off family.
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2.Drawing the Basic Keynesian Model
Kor is a simple economy where the consumption function is given by C = 50 + 0.75(Y-T). We are also told that I=40, G=30 and T=20. As usual, C = consumer expenditure, Y = national income (GDP), T = tax revenue, I = investment, and G = government spending on goods and services. Exports (X) of 25 are exactly matched by imports (IM) of 25.
- Graph the curves for C, I and G (against Y) on a carefully labeled diagram.
- On the same graph put planned Aggregate Expenditure (= AE).
- On the same graph put the equilibrium line (where AE =Y).
- Calculate the equilibrium level of national income (in $) and mark it on the diagram.
- Now raise government spending to 50. Show the new AE curve, and compute the new level of equilibrium national income.
- In 5., did GDP rise by more or by less than the increase in government spending? Why or why not?
3.IMF: World Economic Outlook
Twice a year, the International Monetary Fund (IMF) publishes its World Economic Outlook, which you will find on the web. This is the most recent version of the report, which appeared in October 2017.
1. What is the main theme of this report? [200 words max]
2. The report warns that “medium-term risks are still tilted to the downside”. What are the concerns behind this statement? [200 words max]
Table A2 of the report provides projections of real GDP for the world’s “advanced” economies through 2022, and in Table A4 it does the same for “emerging market and developing economies”. Based on this information,
3. Which major advanced countries are expected to grow most quickly in 2017 and 2018? [By “major”, I mean a country with at least 40 million inhabitants.]
4. Construct a table with a row for each of the major regions of the developing and emerging world, and show the real GDP growth for 2016, and expected GDP growth for 2017, 2018, and 2022. Which of these regions is expected to grow most strongly in the years ahead?
5. Why does the IMF expect negative growth in 2017 in Yemen, the Republic of Congo, and Trinidad & Tobago? [You might want to dig a bit further to answer this; short answers are fine.]
6. Has economic growth in the US been stronger or weaker than in other high-income countries over the past several years? Justify your answer, and suggest an explanation.
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