Question 1

Explain fully how the equilibrium output, income, and employment are determined in the Keynesian model. Illustrate with an appropriate graph.

Suppose that the equilibrium GDP is $500billion and the full employment GDP is $600billion. If the slope of the AE curve is 0.8, how much would the government have to change its expenditure to get the economy to full employment equilibrium? Illustrate your answer with an appropriate graph, and show the numerical values in your graph.

Explain your understanding of the multiplier process used in answering part B.

Question 2

In the basic Keynesian model, fiscal policy should not cause an increase in the public debt. However, in this course you have learnt that most national governments have accumulated public debt by mis-using the Keynesian model. The worst example cited is that of Greece.

Explain why governments find it difficult if not impossible to use fiscal policy without accumulating debt.

Explain how discretionary fiscal policy is different from automatic stabilizers. Which one is the more likely to cause the debt accumulation problem in part A?

Explain why a foreign debt is worse than a domestic debt.

Question 3

Explain fully why a money economy is much more productive than an economy without money.

Explain fully how banks create money.

Question 4

Explain the Keynesian transmission mechanism, and use graphs to illustrate.

Suppose that there is an increase in the demand for money. Explain fully how this changes the equilibrium interest rate and GDP. Use graphs to illustrate.