A Use the Keynesian-Cross Model to Illustrate Graphically the Impact

question 14

Essay

a. Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income. Be sure to label:
i. the axes
ii. the curves
iii. the initial equilibrium values
iv. the direction the curve shifts
v. the terminal equilibrium values

b. Explain in words what happens to equilibrium income as a result of the increase in the interest rate.

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Definitions:

Equilibrium Outcome

A state in a game where all players have chosen their strategies and no participant can gain by unilaterally changing their own strategy.

Prisoners' Dilemma

A scenario in game theory where individuals acting in their own self-interest pursue a course of action that does not result in the ideal outcome for any participant.

Maximin Strategy

A decision rule used in game theory and decision theory aiming to maximize the minimum payoff.

Dominant Strategies

A strategy in game theory that yields the best outcome for a player, no matter what the other players do.