Chapter 7: The Keynesian model with Government and foreign sector

Question 1

What symbols are included when government is included in the Keynesian model?

Answer 1

G: Government spending
T: Taxes

Question 2

What makes up autonomous spending and what impact does G have?

Answer 2

C + I + G

Curve shifts up, multiplier remains the same

• higher aggregate level of spending
• multiplier unchanged
• higher equilibrium, ceteris paribus

This means increases in G can be used to increase production and income levels (Fiscal policy)

Question 3

What are t and m? What is its impact on the multiplier?

Answer 3

m is the marginal propensity to import and it reduces the multiplier.

t is tax and reduces the multiplier