# intermediate quantitative economics questions

Here are the five questions

1. Keynesian cross and Keynesian multiplier: In the Keynesian cross, assume that the consumption function is given by

C = 150 + 0.75 (Yâ€“T).

Planned investment is 75; government purchases and taxes are both 100.

1. a) Graph planned expenditure as a function of income.
2. b) What is the equilibrium level of income?
3. c) If government purchases increase to 110, what is the new equilibrium income?
4. d) How big is the Keynesian government purchases multiplier in this example?
5. e) What level of government purchases is needed to achieve an income of 1100?

2. Keynesian cross and Keynesian multiplier, pt. 2: Suppose that householdsâ€™ marginal propensity to consume is 2/3. According to the Keynesian cross, what is the impact on equilibrium GDP of each of the following? (In each case, state the direction of the change and give a formula for the size of the impact, but you do not need to draw a diagram.)

1. a) An increase in government purchases Î”G.
2. b) An increase in taxes Î”T.
3. c) Equal-sized increases in both government purchases and taxes, Î”G = Î”T.

3. IS-MP model. The coronavirus pandemic has had many negative effects on the U.S. economy. One of these effects is that many businesses are concerned that they may not be able to reopen for several weeks and that, when they do reopen, they may have to operate at a lower capacity than before to maintain social distancing. Suppose that, as a result of these uncertainties, businesses have become less confident in the future and have reduced their desire to invest. (For the purposes of this question, ignore any other potential effects of the pandemic on the U.S. economy.)

1. a) What is the effect of the decrease in business confidence on the IS and MP curves?
2. b) According to the IS-MP model, what would happen to output and the real interest rate inthe short run? Draw a diagram to help explain your answer.
3. c) What would happen to consumption, government purchases, and taxes?
4. d) Can you say what would happen to investment? Explain why or why not. (Hint: look atthe equation PE = Y to get some insight.)

4. IS-MP model. In order to help the U.S. economy, President Trump has argued that Congress should pass a substantial payroll tax cut (which would reduce the amount of taxes being taken out of workersâ€™ paychecks).

1. a) What is the effect of a decrease in government taxes on the IS and MP curves in the shortrun?
2. b) According to the IS-MP model, what would happen to output and the real interest rate inthe short run? Draw a diagram to help explain your answer.

c) What would be the effect of the shock on consumption, investment, and taxes? Briefly explain why.

d) Briefly explain how your answer in part c is related to â€œcrowding outâ€.

5. IS-MP model. Prior to the coronavirus crisis, President Trump was very critical of the Federal Reserve and its chairman, Jerome Powell. Suppose that Chairman Powell resigned and was replaced with a new Federal Reserve Chairman who is less worried about inflation and sets interest rates lower than before.

1. a) How would the IS and MP curves shift in response to the new Fed chairman?
2. b) What would happen to the real interest rate and output in the short run, according to theIS-MP model? Draw a diagram to help explain your answer.
3. c) What would be the effect of the shock on consumption, investment, governmentpurchases, and taxes? Briefly explain why.