In: Economics
In a far away country called Neverland, the economy
has the following structure:
Goods Market:
C = 200+ 0.8Y – 500r
I = 200 – 500r
G = 196
T = 20+ 0.25Y
Asset Market:
MP = 0.5Y – 250i
MS = 9890
T = 0.10
Labor Market:
Y = 1000
(a) Find the equilibrium real and nominal interest
rates, price level, consumption and investment.
(b) Suppose a deadly epidemic hits Neverland and the
government imposes a curfew in the evenings. The consequence of
this policy is a drop of 60 in autonomous consumption, that is the
consumption function is now C = 140 + 0.8Y – 500r. How will the
real and nominal interest rate, consumption and investment change
in the short-run (In the short-run prices are sticky at the level
you have found in part (a).)
(c) Yiğit, a prominent economic advisor to the
president of Neverland, believes in markets. He suggests an
immediate increase in government spending from 196 to 220 to boost
the economy. He also argues that such an increase in government
spending has to be financed later on by increasing taxes and fine
people of Neverland knows this fact. He claims that they will their
supply of labor that in turn will increase the full-employment
level of output to Y = 1025. He argues that people reach almost
same consumption level as before. What will be effects of this
policy on consumption, investment, the real and nominal interest
rates?
(d) Sena, also a prominent economist, but an advisor
to the opposition party in Neverland, is known for her Keynesian
tendencies. She argues that the wages are fixed at efficiency wage
level and no fine people of Neverland is willing to work for lower
real wages and no good firm in Neverland will be hiring more
workers. If she is right, what will happen to consumption,
investment, the real and nominal interest rate?
THIS IS A QUESTION. IT HAS NOT MORE CONTENT. I SEND IT THREE TIMES.
PLEASE SOLVE THIS ACCORDING THIS INFORMATION.
HI. THERE SEEMS TO BE A SOME THINGS MISSING OR RATHER THE NOTATIONS ARE CONFUSING. I AM DOING AS PER MY UNDERSTANDING.
ASSUMING MP IS ACTUALLY M/P (TYPO), T = 0.1 IS INFLATION RATE AND THAT Y=1000 IS FULL EMPLOYMENT LEVEL OF OUTPUT. HOPE THIS HELPS.