Question

In: Economics

) Consider an economy described by the following equations: Real Sector &n

) Consider an economy described by the following equations:

Real Sector b. Monetary Sector

Y=C + I +G Demand for Money; r = 100 - M

C = 100 + 0.8 (Y –T) Supply of Money : M* = 90

I = 400 – 20 r

G =120

T = 100

Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate (%). And M is the stock of money. If the economy were at full employment (that is at its natural rate), GDP would be 2,000.

What is current actual level equilibrium level of GDP(Y*)?

Y* =_____________________

What is the marginal propensity to consume (MPC) in this economy? MPC=__0.8______
What is the magnitude of Government Purchase’s multiplier effect?__________________
Suppose the central bank reduces money supply and reduces money stock from

M*=90 to M**=80. Then what is new equilibrium level of GDP(Y**)? Y**=__________

Choose a monetary policy by the central bank to reduce money supply from below:

Sell Government bonds (b) reduce required reserve ratio (c) reduce discount rate (d) reduce federal funds rate

__reduce federal funds rate__________________

Assuming no change in monetary policy, what change in government purchases would restore full employment?

ΔG =________5_______

Assuming no change in fiscal policy, what change in interest rate (Δ r) would restore full employment?

Δ r =________________

In case of (5), assume that the inrease in government purchases raises the demand for money in (b) monetary sector from r= 100 - M to r = 110 – M. This causes the equilibrium interest rate to rise to a new level (r**) and the investment to be reduced to a new level (I**).

Find out r** __________ and I**___________

Continuing from (7), the increase in interest rate implies the cost of borrowing will increase and therefore, it will reduce investment which is defined as________________
Draw two diagrams (a) The Money Market and (b) The Aggregate Demand Curve below to explain (7) and (8):

(b)

Expert Solution

Rahul Sunny answered 9 months ago

Consider an economy described by the following equations: Real Sector &n

Consider an economy described by the following equations: Real Sector b. Monetary Sector Y=C + I +G Demand for Money; r = 100 - M C = 100 + 0.8 (Y –T) Supply of Money : M* = 90 I = 400 – 20 r G =120 T = 100 Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate (%). And M is the stock...

Consider an economy described by the following equations:

Consider an economy described by the following equations: Y=C+I+GY=C+I+G C=100+0.75×(Y - T)C=100+0.75×Y - T I=500?50×rI=500?50×r G=125G=125 T=100T=100where Y is GDP, C is consumption, II is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at the natural rate of output), GDP would be $2,000.Identify the equation(s) each of the following statements describes. Check all that apply.StatementCIGTIt is an autonomous amount, independent of other factors. It is a function of disposable income. It depends on the interest rate. The...

Consider an economy described by the following equations: Y = C + I + G +...

Consider an economy described by the following equations: Y = C + I + G + NX Y = 8,100 G = 2,300 T = 2,100 C = 500 + 2/3 (Y – T) I = 900 – 50r NX = 1,500 – 250e r = r* = 8. a. (4 points) In this economy, solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. b. (3 points) Suppose now that G is...

Consider an economy described by the following equations: Y = C + I + G Y...

Consider an economy described by the following equations: Y = C + I + G Y = 5000 G = 1000 T = 1000 C = 250 + .75 (Y - T) I = 1000 - 50r a. In this economy, compute private saving, public saving, and national saving b. Find the equilibrium interest rate c. Now suppose that G rises to 1250. Compute private saving, public saving, and national saving d. Find the new equilibrium interest rate.

Consider a classical economy described by the following equations Y = C + I + G...

Consider a classical economy described by the following equations Y = C + I + G Y = 6000 G = 1200 T = 0 C = 3600 – 2000 r + 0.1 Y I = 1200 – 4000 r a. Develop an equation relating national savings to r and y. (Hint solve for private savings and then public savings) b. Find the real rates interest that clears the good market. c. Suppose government produces rises to 1440. How does...

Equilibrium in the Classical model: Consider an economy described by the following equations: Y = C...

Equilibrium in the Classical model: Consider an economy described by the following equations: Y = C + I + G Y = 12,000 G = 2,000 T = 2,000 C = 500 + 0.75*(Y – T) I = 2,400 – 80*r a) In this economy, compute private saving, public saving, and national saving. b) Find the equilibrium real interest rate r. c) Now suppose that G rises to 1,200. Compute private saving, public saving, and national saving in this case....

Consider an economy in the short-run described by the following equations: Z = C + I...

Consider an economy in the short-run described by the following equations: Z = C + I + G G = 500 T = 500 C = 200 + 0.75(Y – T) I = 425 + 0.05Y Suppose that consumers decide to consume less (and therefore save more) for any given amount of disposable income. Specifically assume that consumer confidence falls and C = 200 + 0.75(Y-T). Assume the initial function for I = 425 + 0.05Y and the initial value...

Consider an economy described by the following equations Y = C + I + G Y=4,000...

Consider an economy described by the following equations Y = C + I + G Y=4,000 G= 1,000 T=800 C =400 + 0.75(Y–T) I = 1,000–50r(a) For this economy, compute the following [1.5 Points each; 6 Points total]1. Private Savings2. Public Savings3. National Savings4. Equilibrium interest rate (b) Is this economy running a budget surplus, budget deficit or a balanced budget? Explain. [2 Points] (c) Suppose that Congress decides to reduce government spending. The new level of government spending is...

Consider a closed economy described by the following equations (all figures in millions of dollars): Y...

Consider a closed economy described by the following equations (all figures in millions of dollars): Y = C + I + G + NX Y = 8,000 (current value of output) G = 2,000 T = 1,000 + .1(Y) C = 450 + 0.75 (DI) I = 2,000 NX = 0 What is the current state of this economy in term of private saving, public saving and the balance between current level of investment and private domestic saving? Suppose government...

Consider a classical model of large-open economy described by the following equations: Y = C +...

Consider a classical model of large-open economy described by the following equations: Y = C + I + G + NX Y = 8,000 G = 2,500 T = 2,000 C = 500 + 2/3 (Y − T) I = 1,000 − 50r CF = 500 − 50r NX = 1,000 − 250ε where Y is output, C is consumption, I is investment, G is government purchases, NX is net exports, T is taxes, r is the real interest rate,...