Consider the economy of Farland. C = 200 + 0.75(Y – T) I = 200 – 25r M = 1000; P = 2 G = 100;T = 100 %3D %3D d M = Y – 100r a. Find equilibrium interest rate and the equilibrium level of income Y b. With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium iaterest rate and level of income? c. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if government increases its purchaşes or National Bank provides more money supply?
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- How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?4. The foreign sector is added to the Keynesian national income model and there is a positive marginal propensity to import. X is the export and Z (in capital letter) is the import and C (in capital letter) is the consumption. Y = C+1+G+ (X – Z) C = c+ bY Z = z + mY Find: (i) The equilibrium level of income, consumption and import (ii) Specify the ranges of b and m and give the economics interpretations (iii) Identify the endogenous and exogenous variables from the model7. Marginal propensity to import and net exports The following graph shows net exports for a hypothetical country. U 50 50 40 20 20 NET EXPORTS (Billions of dollars) 10 10 -10 20 -20 300 400 ⑦? 500 600 700 REAL GDP (Billions of dollars) 0 100 200 13 and According to the graph, when the country is producing a real GDP of $400 billion, exports are function is equal to the than imports. The slope of the net exports and thus tells you that for every $1 increase in real GDP, do not change (because they are assumed to be autonomous with respect to real GDP). by
- 4. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C=195+0.80° (DY) Investment Spending, I-25 +0.10°Y Government Spending, G-6+0.15*Y Net Export Spending, X-14-0.05*Y Tax Collections, Tx = -20+0.25*Y a. What is the equilibrium income for this economy (Show your work)? b. At the equilibrium income, what is the size of the government surplus (or deficit)? den Cal Page 3 601 c. If the Government decided to Increase G spending by 15, what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Reduce Tx (taxes) by 6, what would be the new equilibrium income for this economy (Show your work)? yanoM e. If instead the Government decided to Increase G spending and Increase Tx (taxes) both by 30, what would be the new equilibrium income for this economy (Show your work)?3. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C-140 +0.60*(DY) Investment Spending, I-25 +0.15"Y Government Spending, G-0 Net Export Spending, X=0 Tax Collections, Tx = 0 a. What is the equilibrium income for this economy (Show your work)? b. If the Government decided to Increase G spending by 6, what would be the new equilibrium income for this economy (Show your work)? Page 2 bed tooing c. If instead the Government decided to Reduce Tx (taxes) by 10 (i.e., send checks to people), what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium income for this economy (Show your work)?2. Consider an economy where aggregate demand AD consists of aggregate con- 1000 and government = sumption C 10+ 0.8Y, aggregate investment I spending G = 800. (a) = (c) (d) What is aggregate demand if aggregate income/output is 10,000? Why is the economy not in equilibrium in that state? Calculate the goods market equilibrium for this economy. (b) Assume that the government increases spending by 20%. Calculate the new goods market equilibrium. What is the multiplier for the change in government spending? Assume now that the country starts trading globally and has Exports and Imports. Assume that imports are given by Im = n Y, with n being the marginal propensity to import. (e) Explain why - with exports and imports - a increase in government spending (e.g., 20%) results in a smaller change in aggregate demand/income in equilibrium than without exports and imports. (You do not have to calculate the new equilibrium.)
- Q3.Monetary and fiscal policy to manage the economy and growth The small industrial economy of Belgand wants to have FEWPS (full-employment with price stability). The economy has the following characteristics (millions of Belgmarks) "i" denoted interest rate. The equilibrium output is currently: Ya* Marginal propensity to consume MPC = Asset Demand Interest-determined 8000 part of desired investment I(i) | 100 | 200 250 for Money %3D Md | 160 240 0.8 12 12 Full employment level of output (Potential GDP) Yp The money supply is 520. Banks must keep a 12.5% required reserve ratio (RR) against deposits. No Excess reserves. 11 11 7000 10 320 10 222 0.125 8. 9. 400 9. 300 440 8. 350 480 520 400 6. 6 500 700 Interest-determined part of investment "I(i)" and the demand for money "Md" are shown to the right. The money supply is defined as "demand deposits" (ignore transaction demand). 1) Sketch and label economic conditions on graph. 2) Calculate the multiplier and the income and Aggregate…1. State whether each of the following transactions is a part of aggregate demand in the United States, and if so whether it is Consumption spending, Investment, Government purchase, Exports, or IMPORTS For example, "Dieter, a German resident, buys frozen chickens that were raised in the U.S." Answer: No, IMPORTS a) David buys a keyboard synthesizer made in the United States. b) A Japanese automaker buys stock in an American auto company. c) A Japanese automaker builds an assembly plant in Illinois. d) Will buys a compact disc player made in Japan. e) The U.S government sends an insurance check to Renee, an unemployed keypunch operator. f) Mark buys a three-year-old used car. g) The state government sends a salary check to Karen, an economics instructor at CUNY.56. Figure: Policy Alternatives Price level P₁ P₂ Panel (a) LRAS SRAS SRAS AD₁ Y, Yr Y₂ Price level P₂ increase its spending. increase taxes. decrease its spending. decrease the quantity of money. P₂ P₁ Panel (b) LRAS SRAS, Y, Y Y₂ AD, Real GDP AD₁ Real GDP Refer to Figure: Policy Alternatives. In panel (b), the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P2. If the government decides to intervene, it will MOST likely:
- 1. Let us say the estimated equation for the economy's aggregate demand is Y=400 – 15P+ 8G And the estimated equation for the economy's aggregate supply is Y=5+11P-10W where Y is the country's real GDP, P is the price level (GDP deflator), G is government purchases of goods and services, and W is the index of wages. a. If G= 160 and W= 100, find the equilibrium real GDP and the price level in the economy. b. What is the simple multiplier in this economy? Give the number and explain how you figured it out. c. What is the inflation rate due to the government increasing its purchases from G=160 to G= 180 (expansionary fiscal policy), in %? d. What is the value of the multiplier when the price level varies? 2. Imagine an economy in which the slope of the AD curve is equal to the (negative of) slope of the AS curve. If the simple multiplier is equal to 5, what is the value of the multiplier when the price level varies? Give the number and explain how you figured it out.1. Look at the figure. If the economy is in equilibrium at E and the government does not intervene, the result will likely be a shift of: Price level P2 g9 P1 LRAS YP Y1 Figure 1 SRAS 2 SRAS 1 AD1 Real GDPQuestion 1. Explain why the Aggregate Demand curve is downward sloping . 2. Explain why the Aggregate Supply curve is upward sloping . 3. What determines potential output Yf, and how can the economy exceed Yf in the short run? 4. Explain the Equilibrium condition of Aggregate Expenditure= output Y. How are inventory changes related to AE and Y? 5. Define the multiplier and the marginal propensities to consume (MPC) and save (MPS). What is the relationship between the MPC and the multiplier? 6. Compare and contrast the short run Keynesian and long run Neoclassical views of the aggregate supply and Phillips curves 7. For each the following economies, calculate equilibrium Y*, the multiplier, and the size of the recessionary or inflationary gap, if any. a. AE= 250 +.75 Y Yf= 1200 b. AE= 400+ .9 Y Yf= 3000 c. AE= 300 +. 8Y Yf=1500 d. AE= 300+ .67 Y Yf=1000