(Solved): Question 2: The Keynesian cross model, a numerical exercise Consider the following hypothetical eco ...

Question 2: The Keynesian cross model, a numerical exercise Consider the following hypothetical economy: $$\begin{array}{l}C=120+0.6(Y?T)\\ \stackrel{?}{I}=150\\ G=200\\ T=100\end{array}$$ All variables are in units of constant dollars per year (\$). (a) What is the equilibrium level of GDP $$(Y)$$ ? Make sure that you start from the equilibrium condition, and show your work. (b) Say that the government increases government spending by 100. i. What is the new level of GDP? How much does GDP increase? ii. Does GDP increase by more or less than the initial increase in government spending? (c) Now assume investment is described by $$I=100+0.3Y$$. Return government spending to its original level of 200 . i. What is the equilibrium level of GDP $$(\mathrm{Y})$$ ? ii. Say that government spending increases by 100 . How much does GDP increase? (d) Compare your answers to (b) and (c): Is fiscal policy more effective or less effective in an economy where investment also responds to GDP? (Or, put differently, does 100 in government spending lead to a bigger increase in GDP in an economy where investment also responds to GDP or in an economy in which investment is constant?)