In the Keynesian cross, planned expenditures arePE

=

C

(

Y

T

)

+

I

(

r*

)

+

G

+

NX

(

Y

,

Y

f

,

)

PE=CY-T+Ir*-+G+NXYYf

Use the consumption functionC

(

Y

T

)

=

200

+

0.8

(

Y

T

)

CY-T=200+0.8Y-T

the planned investment functionI

(

r*

)

=

50

200

(

r*

)

Ir*-=50-200r*-

and the net export relationNX

(

Y

,

Y

f

,

)

=

10

+

0.3

Y

f

0.1

Y

20

NXYYf=10+0.3Yf-0.1Y-20

The real exchange rate is

=

e

P

P*

=ePP*

Assume thatP

=

P*

P=P*

, that foreign income isY

f

=

500

Yf=500

, that global interest rater*

=

0.05

r*=0.05

, that inflation is

=

0.02

=0.02

, and that government purchases and taxes are both 100.

1. ComputePE
2. PE
3. for the Keynesian cross so you havePE
4. PE
5. on the left side of the equation and bothY
6. Y
7. and
9. as variables on the right side. You'll need this for theIS*
10. IS*
11. curve.
12. (Economics Powertool graph paper required) Plot the Keynesian cross fore
13. =
14. 2
15. e=2
16. . Be sure to label the axes and the planned expenditure function asPE
17. 0
18. PE0
19. .
20. Compute equilibrium incomeY
21. 0
22. Y0
23. and show it on your graph.
24. ComputeC
25. C
26. from the equations above and use the relation that private savings isS
27. =
28. Y
30. T
32. C
33. S=Y-T-C
34. to compute net capital outflow(
35. T
37. G
38. )
39. +
40. S
42. I
43. T-G+S-I
44. .
45. ComputeNX
46. NX
47. from the equations above.
48. Verify that net capital outflow equals net exports.
49. (Economics Powertool graph paper required) Plot theIS*
50. IS*
51. curve for the market for goods and services for this problem.