Macro Mankiw Homework 4

PE=YΔ

An increase in government purchases shifts the expenditure curve upwards and causes an increase in the short-run output level for a given level of interest rates.

Y2

Y1

Y

PE

ΔPE2= C(Y-T) +I(r) +ΔG

ΔPE=C(Y-T) +I(r) +ΔG

1A

Y

PE

ΔPE=ΔC(Y-ΔT) +I(r) +G

PE=Y

an increase in taxes shifts the expenditure curve downwards and decreases the short-run output for a given level of interest rates.

Y2

ΔPE2=ΔC(Y-ΔT) +I(r) +G

Y1

1B

1C. the ΔG in the Keynesian cross is given: 11-MPC and the ΔT is given as -MPC1-MPC They measure the response of the output level to unitary changes in output and taxes, when the interest rates are kept constant an equal increase in G and T cause an increase in the output level if r remains unchanged. 11-MPC - -MPC1-MPC = 1, therefore if equal ΔG and ΔT, the output level remains increases the same amount.

Y1

Y

PE

PE=Y

PE= 325 + 0.75Y

45°

2A

PE=325

C=200 + .75(Y-T), I(r)= 100, T= 100, G= 100

=C+I+G

=200+0.75(Y-100) +100+100

=325+0.75Y

2B.

The slope of the expenditure curve is .75. It follows that the 45 degree line and the expenditure curve intersects at some point. That point determines the short run level of output in the Keynesian cross. So

Y1 = 325 + .75 Y

(1-.75)Y=325

.25Y=325

Y1=1300

2C

If the ΔG=125, then:

C=200 + .75(Y-T), I(r)= 100, T= 100, G= 125

=C+I+G

=200+0.75(Y-100) +100+125

=350+0.75Y

The new short run output level is:

Y=350+.75Y

(1-.75)Y=350

.25Y=350

Y=1400

A ΔG= ↑of 25, causes an increase in output that is equal to 100 units. The reason why the initial increase in G is multiplied is an increase in G has a first and initial effect on output. The increased output means a higher level of disposable income for households. More disposable income means increased consumption, which in turn increases output even further.

2D

Use G and set the original equation equal to 1600:

1600=200+0.75(1600-100) +100+G

1600=200+1200-75+100+G

1600=1425+G

175=G...