The following graph plots three planned expenditure lines for a hypothetical economy, each associated with a different price level. The line labeled PE120 corresponds to a price level of 120; the line labeled PE 100 corresponds to a price level of 100; and the line labeled PE140 corresponds to a price level of 140. The graph also includes the 45-degree line that plots all points at which planned expenditure equals real income. EI ? 800 PE (P =100) 700 PE, (P = 120 ) 600 PE, (P = 140) 500 400 PLANNED EXPENDITURES (Bilions of dollars) 300 200 100 0 0 100 200 300 400 500 600 700 800 REAL INCOME (Billions of dollars)At a price level of 100, the level of equilibrium output is E On the following graph, plot the aggregate demand curve that results from varying the price level from 100 to 120 to 140, holding all else equal. Hint: Real income and the quantity of output are equivalent. For example, a real income of $100 billion is the same as a quantity of output of $100 billion. EI 160 O 150 Aggregate Demand (AD) 140 130 PRICE LEVEL 120 110 100 100 200 300 400 500 600 700 800 QUANTITY OF OUTPUT (Billions of dollars)Homework (Keynesian Cross) Consider two hypothetical economies that are perfectly similar except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real income and planned expenditure equal to $100 billion, as given by the black points (plus signs) on the following two graphs. Assume that both economies are closed to trade, and that neither economy has taxes that change with income. The graphs also plot the 45-degree line. The first economy has an MPC equal to 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy has an MPC equal to 0.70. Therefore, its initial planned expenditure line has a slope of 0.70 and passes through the point (100, 100) . EI Now, suppose there is an increase of $30 billion in planned investment in each economy. Place a green line (triangle symbol) on each of the preceding graphs to indicate the new planned expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium income. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) MPC=0.5 200 45-Degree Line 180 New AE Line 160 C+ s of dollars) 140Homework (Keynesian Cross) ? MPC=0.5 200 45-Degree Line 180 160 New AE Line SI 140 120 New Equilibrium 100 PLANNED EXPENDITURE (Billions of dollars) 60 AE Line 40 20 0 20 40 60 80 100 120 140 160 180 200 REAL INCOME (Billions of dollars) ? C-X ? MPC=0.70 A-Z 200 45-Degree Line 180 A 160 New AE Line 140 120 New Equilibrium PLANNED EXPENDITURE (Billions of dollars) 100 8 40 AE Line 20 At 20 40 60 80 100 120 140 160 180 200 REAL INCOME (Billions of dollars) C+ In the first economy (with MPC = 0.5), the $30 billion increase in planned investment causes equilibrium income to increase by $ billion . In the second economy (with MPC = 0.70), the $30 billion increase in planned investment causes equilibrium income to increase by |$ billion . O Therefore, a lower MPC is associated with a multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier:this course ? X 20 40 60 80 100 120 140 160 180 200 REAL INCOME (Billions of dollars) A-Z E In the first economy (with MPC = 0.5), the $30 billion increase in planned investment causes equilibrium income to increase by |$ billion . In the second economy (with MPC = 0.70), the $30 billion increase in planned investment causes equilibrium income to increase by | $ billion . Therefore, a lower MPC is associated with a multiplier. EI Now, confirm your graphical analysis algebraically using the formula for the multiplier: Multiplier = 1-MPC For the first economy with an MPC of 0.5, the effect of the $30 billion increase in planned investment becomes the following: Change in Equilibrium Real Income = Change in Planned Expenditure X Multiplier ? X X Using the same method, the multiplier for the second economy is Grade It Now Save & Continue6. The multiplier effect X Consider a hypothetical economy. Households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The multiplier for this economy is E A-Z Suppose government purchases, G, in this economy increase by $300 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. EI Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $300 billion First Change in Consumption = $ billion Second Change in Consumption = $ billion Total Change in Income = $ billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be ; thus, if taxes O change by $300 billion, spending will change by |$ billion . will have the larger effect on income, given the Based on your results, this Keynesian model predicts that a change in initial change in planned expenditures is of the same magnitude. Grade It Now Save & ContinueThe following graph plots the planned expenditure line (PE) for an economy in which current equilibrium income is $300 billion and the full- employment income level is $600 billion. The graph also plots a 45 degree line on the same coordinate pair. E A-Z 700 45-degree line O 600 PE 500 PE 400 REAL EXPENDITURE (Billions of dollars) 300 200 100 Full-Employment Income 100 200 300 400 500 600 700 INCOME (Billions of dollars) C- The economy is experiencing . The absolute value of the income gap is equal to $ billion. Closing the gap would require a $ billion in government spending. Thus the value of the multiplier for this economy is VQ Search this course Homework (Keynesian Cross) X The following table shows consumption (C), investment spending (1), and government purchases (G), for some hypothetical economy at several levels of income (reported in billions of dollars of real GDP). Assume that in this economy, income is taxed at a rate of 25%, base consumption is $100 billion, and that the marginal propensity to consume (MPC) is 0.333, or 1/3. Further assume that this economy is closed, that is, there is no international trade and so net exports are always equal to zero. A- Use the given information to fill in disposable income, consumption, and planned expenditures in the following table. Income: Real Disposable (After Tax) Planned GDP Income C Ip G Expenditures (Billions of (Billions of dollars) (Billions of (Billions of (Billions of ( Billions of dollars) dollars) dollars) dollars) dollars) 0 0 100 50 150 100 50 150 200 50 150 300 50 150 400 50 150 500 50 150 A. The following graph shows income (real GDP) on the horizontal axis and planned expenditure on the vertical axis. C- Use the black line (plus symbol) to plot a 45-degree line on this graph. Then use all 6 of the the blue points (circle symbols) to plot the planned O , 100, 200, 300, 400, and 500 billion dollars)Use the black line (plus symbol) to plot a 45-degree line on this graph. Then use all 6 of the the blue points (circle symbols) to plot the planned expenditure line for this economy. Be sure to plot these points at the income levels listed in the table (0, 100, 200, 300, 400, and 500 billion dollars). Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. A-Z EI 600 500 45-Degree Line O bongo 400 PE Line PLANNED EXPENDITURES (Billions of dollars) 300 Equilibrium Income 200 At 100 C+ 0 100 200 300 400 500 600 INCOME (Billions of dollars) lus symbol) to indicate the equilibrium income.600 500 45-Degree Line O 400 PE Line 300 PLANNED EXPENDITURES (Billions of dollars) . + EI Equilibrium Income 200 100 100 200 300 400 500 600 INCOME (Billions of dollars) On the previous graph, use the black point (plus symbol) to indicate the equilibrium income. Note: Dashed drop lines will automatically extend to both axes. Suppose income is currently $500 billion. This would mean that , which would send a signal to firms to ContinueSuppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. E A-Z Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) ( Billions of dollars) 7 55 30 -15 50 40 -10 45 50 -5 A 40 60 0 W 35 70 N 30 80 10 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. A+ C+ Market for Loanable Funds 10 OGiven the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Market for Loanable Funds 10 O Demand Supply REAL INTEREST RATE + Equilibrium A. C 20 40 60 100 QUANTITY OF LOANABLE FUNDSX On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. E A-Z Net Capital Outflow EI 10 A 8 NCO + 6 Eqm. NCO REAL INTEREST RATE ? 2 A+ -20 -15 -10 -5 5 10 15 20 NET CAPITAL OUTFLOW (Billions of dollars) Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencingSearch this course X Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing Now, suppose the government is experiencing a budget deficit. This means that , which leads to loanable funds. A-Z After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign- currency exchange market. Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit. Market for Foreign-Currency Exchange Initial Supply Supply with Deficit REAL EXCHANGE RATEHomework (Ch 19) show the supply curve after the budget deficit. X (?) Market for Foreign-Currency Exchange A-Z 10 A EI Initial Supply 6 Supply with Deficit REAL EXCHANGE RATE 2 Demand ? -20 -15 -10 -5 0 10 15 20 At QUANTITY OF DOLLARS (Billions) C+ Summarize the effects of a budget deficit by filling in the following table. Real Interest Rate Real Exchange Rate Trade Balance Effects of a Budget DeficitThe graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO) calculated in terms of the Mexican peso. The Market for Loanable Funds in Mexico Mexican Net Capital Outflow 00 Supply 8 7 6 5 REAL INTEREST RATE (Percent) REAL INTEREST RATE (Percent) 4 A NCO Demand 3 w 2 N 0 2 4 5 6 7 8 4-3/- 2 -1 0 1 2 3 4 5 6 LOANABLE FUNDS (Billions of pesos) NET CAPITAL OUTFLOW (Billions of pesos) C-Complete the first row of the table to reflect the state of the markets in Mexico Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) Initial state After capital flight Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico as unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is known as capital flight. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the questions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium interest rate. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both. The Market for Foreign-Currency Exchangequestions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium interest rate. E Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both. The Market for Foreign-Currency Exchange Supply O- Demand Supply REAL EXCHANGE RATE (Dollars per peso) Demand C-The Market for Foreign-Currency Exchange A-Z Supply O Demand Supply REAL EXCHANGE RATE (Dollars per peso) Demand QUANTITY OF PESOS At Summarize the results of capital flight by completing the following table. Real Interest Rate Real Exchange Rate Net Capital Outflow Effects of capital flight