Macro-economics

IlanSherer

Hello

The aggregate demand function of a closed economy: AD = 1000 + 0.75Y (Y = income).
Marginal propensity to invest is 0.15, inflationary gap is 30 and the demand for money is not dependent on product/GDP.
Therefore, if the government is interested in bringing the economy/farm to equilibrium in full employment by increasing public consumption and financing expenditure by taxes, then the required increase in public consumption is 75.

I didn't understand why it's 75.

Thanks!

JeffM1

I could do some research and probably figure out what macroeconomic model you are using. Or you could provide the model that you are using by specifying the equations and definitions that make it up. If you do the latter, you will probably figure out the answer on your own.

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IlanSherer

I could do some research and probably figure out what macroeconomic model you are using. Or you could provide the model that you are using by specifying the equations and definitions that make it up. If you do the latter, you will probably figure out the answer on your own.

Sorry about that, I think it's a Keynesian model - Closed economic/farm. I tried to solve this with using formulas; maybe I don't understand enough how everything works, I just know that public consumption = taxes in the current case.

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JeffM1

I shall do a little research. It does not look like Keynes's model or Hicks's elaboration of it, but those were developed in the 1930's. I doubt it is more than a slight variant, probably just a few tweaks, possibly due to Patinkin, the greatest Israeli economist, who was concerned with inflation in the early days of Israel. If Patinkin created his own variant, it would be natural for it to be taught in Israel.

Can't do it right now. Other obligations.

1 person

JeffM1

I am going to need the definitions and equations used in the model you are supposed to use.

Keynes did use the term "inflationary gap," but not in the "General Theory." It looks as though an early proponent of the term was a teacher of Patinkin. But the fact remains: a general understanding of a theory is no substitute for exact definitions and actual equations when it comes to explaining a computation.

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