Econ 98-Chiu
Keynesian-Cross Worksheet
Name & SID:
Spring 2005
Date:
Assumptions are critical in macroeconomics. Different assumptions change dramatically your
answers. Assume the following conditions for the following questions:
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No government spending (G=0)
Closed economy (NX=0)
Prices are fixed (inflation=0)
Nominal and real interest rates are fixed
Planned investment is autonomous of interest rates (I=constant)
Y refers to real GDP (not nominal)
1. What is the difference between an identity, behavioral relationship, and equilibrium
relationship? Give an example of each.
2. What is the difference between aggregate output and aggregate income?
3. What are the two components of investment spending?
4. What is the major determinant of consumption spending (C)?
Page 1 of 6
Econ 98-Chiu
Keynesian-Cross Worksheet
Name & SID:
Spring 2005
Date:
5. What are the components of consumption spending?
6. Define marginal propensity to consume (mpc).
7. What is planned aggregate expenditure (PAE)?
8. How is planned aggregate expenditure different from aggregate expenditure?
9. Define the equilibrium relationship between aggregate output and planned aggregate
expenditure (as an equation).
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Econ 98-Chiu
Keynesian-Cross Worksheet
Name & SID:
Spring 2005
Date:
10. Draw the Keynesian-cross (Y=PAE) model. Label your aggregate output line, Y=PAE. Label
your planned aggregate expenditure line, PAE. Label the equilibrium GDP, Y1.
11. What happens when Y2>Y1?
12. What happens when Y3<Y1?
13. What is controversial about these adjustment mechanisms?
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Econ 98-Chiu
Keynesian-Cross Worksheet
Name & SID:
Spring 2005
Date:
14. Assume full-employment aggregate output (Yf) is above Y1. Why is Yf not sustainable in
equilibrium? Is Y1 desirable for an economy?
15. What is Keynes’ major argument about full-employment output and equilibrium output?
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Econ 98-Chiu
Keynesian-Cross Worksheet
Name & SID:
Spring 2005
Date:
16. Define the multiplier in words.
17. Define the multiplier as an equation.
18. What is the multiplier effect?
Page 5 of 6
Econ 98-Chiu
Keynesian-Cross Worksheet
Name & SID:
Spring 2005
Date:
19. Suppose the marginal propensity to consume is .95. And suppose planned investment
increases by $2. How much does equilibrium output increase? [ Hint: Y=C+I ]
20. Generalize the change in equilibrium output as a function of the multiplier and the change in
planned investment (as an equation).
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