Using Keynesian analysis, suppose the economy of Morrisville can be described by the following (all amounts...

Using Keynesian analysis, suppose the economy of Morrisville can be described by the following (all amounts are in millions of dollars):

Ca = 15 + .8(Y - 25)

Ia = 25

Ga = 25

X-M = 5

(a) The Marginal Propensity to Consume is .8. Explain IN WORDS what this means.

(b) In this case, with the MPC = .8, what is the value of the multiplier?

(c) Solve for the level of equilibrium income. In words, what does equilibrium in this context mean?

(d) Suppose the full employment or potential level of income is 50 more than your equilibrium calculation in part C). How large of increase in government spending is necessary to reach full employment? How large of tax decrease? Why do they differ?

Expert Solution

Rahul Sunny answered 3 months ago

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