#1 the basic Keynesian model of income determination - so called circular flow - posits current income as the sole determination of the components of demand (c and I in the absence of government...

#1 the basic Keynesian model of income determination - so called circular flow - posits cu
ent income as the sole determina
tion of the components of demand (c and I in the absence of government spending, g) part a) explain this model, including th
e effects of adding G; part b) how are these affects modified when we include both a (flat-rate) tax on income, and a margina
l (= average) propensity to import 'f'?
#2 Define and explain the conditions underlying "short-run" analysis, and within this SR context, discuss the relative effective
ness of expansionary fiscal and monetary in a "closed" economy (ie. where domestic "goods" and "money" markets are in e
quili
ium and the rest of the world is ignored).
#3 In an "open" economy, explain the concepts of and relationship between the "balance of payments" and the market for fo
eign exchange (forex). Using these, derie and explain the third market equili
ium condition expressed in the so called "FE"
curve, including cases of imperfect capital mobility. Finally, analyze the simple case of expansionary fiscal policy for a count
y with "PCM" under a floating exchange rate.
#4 Suppose that Canada, for example, maintains a fixed exchange rate. Discuss what this means for the conduct of Canadi
an monetary policy, and analyze the cases in which the U.S. undertakes an expansionary fiscal policy (as in question 3), an
d/or an expansionary monetary policy on the Canadian economy.
#5 Discuss the criticisms leveled by so called "classical" economists at the Keynesian model described above, from the initia
l simplistic responses that increased government spending would crowd out private investment, while wage cuts would suffic
e instead, to more sophisticated views of Pigou and Friedman.
ANS1.Keynsian model of income determination
Y=C+I
Left hand side is the aggregate supply or aggregate output in an economy. The right hand side
depicts the aggregate demand in an economy. The aggregate demand is composed of C,
consumption expenditure by individuals and I, investment expenditure.
C=a+bY, where a=autonomous consumption and b=marginal propensity to consume.
Investment can be assumed to be exogenous and constant equal to I.
So,
Y= a + bY +I
 (1-b)Y=a+I
 Y*=(1/(1-b)).(a+I)
Where (1/(1-b)) is the keynsian multiplier
The model works in following way. If there is an increase in autonomous consumption or
investment by 1 unit then in the first round it raises the Y by 1 unit, but this increase in Y again
increases consumption by b units which in turn raise Y in second round increase by b units, and
then by
2
units and so on….
Change in Y= 1 + b +
2
+
3
+……..=1/(1-b)
When we introduce government spending G
Y=C+I+G
 Y*=(1/(1-b)).(a+ I +G)
A 1 unit increase in government spending will raise the aggregate output by (1/(1-b))units
When we introduce flat tax rate of t on income then the concept of disposable income comes into
play.
Yd=Y-tY=(1-t)Y
So
Y=C+I+G
 Y=a+b(1-t)Y+I+G
 Y*=(1/(1-b(1-t))).(a+I+G)
It can be observed...