Use the Keynesian cross model to predict the impact of an increase in governmentpurchases on equilibrium GDP. State the direction of the change and give a formula forthe size of the impact.An increase in taxes shifts the planned expenditure function downward. The change inincome is given byAY=ΔΥ=-MPC1-MPCAn increase taxes shifts the planned expenditure function upward. The change in income is givenby-MPC1-MPCAY=XATAn increase in taxes shifts the planned expenditure function inward. The change in income is givenbyAY=11-MPCXAT11-MPCThe direction of the shift is undetermined without knowing the slope of the PE function. Thechange in income is given byXATXAT

The postwar period demonstrates how Keynesianism has evolved in terms of its ability to mitigate…

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Use the Keynesian cross model to predict the impact of an increase in government purchases on equilibrium GDP. State the direction of the change and give a formula for the size of the impact.

Macroeconomics: Principles and Policy (MindTap Course List)

13th Edition

ISBN:9781305280601

Author:William J. Baumol, Alan S. Blinder

Publisher:William J. Baumol, Alan S. Blinder

Chapter8: Aggregate Demand And The Powerful Consumer

Section: Chapter Questions

Problem 8DQ

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Question

Use the Keynesian cross model to predict the impact of an increase in government
purchases on equilibrium GDP. State the direction of the change and give a formula for
the size of the impact.
An increase in taxes shifts the planned expenditure function downward. The change in
income is given by
AY=
ΔΥ=
-MPC
1-MPC
An increase taxes shifts the planned expenditure function upward. The change in income is given
by
-MPC
1-MPC
AY=
XAT
An increase in taxes shifts the planned expenditure function inward. The change in income is given
by
AY=
1
1-MPC
XAT
1
1-MPC
The direction of the shift is undetermined without knowing the slope of the PE function. The
change in income is given by
XAT
XAT

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