Question: In the Keynesian cross model, assume that the consumption function is given by
C = 120 + 0.8*(Y-T)
Planned investment is 200; government purchases and taxes are both 400.
a. Graph planned expenditure as a function of income.
b. What is the equilibrium level of income? (Hint: PE = C + I + G and the equilibrium condition is PE = Y. Plug in for consumption, taxes, government spending and investment, and set that equal to Y).
c. If government purchases increase to 420, what is the new equilibrium income? What is the multiplier for government purchases?
d. What level of government purchases is needed to achieve an income of 2,400? (Assume taxes remain at 400.)
e. What level of taxes is needed to achieve an income of 2,400? (Assume government purchases remain at 400.)