ECON 272

Out of Class Practice Problem on the Keynesian Model

Assume you are a Keynesian planner.  You want to increase aggregate demand such that income increases enough to reach full employment (right now there is some unemployment).

1.  One way of doing this would be to decrease taxes.  Explain why this would increase aggregate demand and graph this.

2.  But there is a problem with increasing taxes.  Aggregate demand might not go up enough to reach full employment.  Explain why and add this change to your graph above.

3.  Since decreasing taxes might not give you the increase in demand and income you want, what would you do to get your largest increase and why?  Graph this.