KEYNESIAN MULTIPLIER MODEL

Problem Solving

Given:

1997 1998 1999 2000

∆ ∆ ∆

NNP 16800 -- -- --

C (s.t.

C=10+0.5Yd)

Ig 4660 -- -- 3000

In -- -- --

G 14000 -- --

X 1340 -- -100 --

M (s.t.

M=5+0.25Yd)

Lump-sum Tax -- -- -- 500

Depreciation 3000 -- -- --

Questions:

1. What is 1997 GNP*?

2. What is 1998 GNP*?

3. What is 1999 GNP*?

4. What is 2000 GNP*?

5. What is the value of C* in 1997?

6. What is the value of C* in 1998?

7. What is the value of M* in 1999?

8. What is the value of M* in 2000?

9. What is the value of S* in 1997?

10. What is the value of S* in 2000?

IMPORTANT THINGS TO REMEMBER:

1. C = a + bYd

Where a = autonomous consumption (permanent),

Yd = disposable income

b = marginal propensity to consume (aka SLOPE)

= ∆C/∆Yd

2. S = Yd – C

3. mpc + mps = 1

KMM Equations:

I = ∆Kstock

Ig = In + dep

In = Ig – dep

NNP = GNP – dep

GNP = C + Ig + G + NX

NNP = C + In + G + NX

IEM = ∆GNP* = 1__

∆I mps

GEM = ∆GNP* = 1__

∆G mps

LSTM = ∆GNP* = mpc_ (CLOSED ECONOMY)

∆LST mps

LSTM = ∆GNP* = mpc-mpm_ (OPEN ECONOMY)

∆LST mps+mpm

GENERAL EQUATIONS:

1. For CLOSED ECONOMY

∆GNP* = 1__

∆Ā mps

2. For OPEN ECONOMY

∆GNP* = ___1____

∆ Ā mps+mpm