2. Analyzing macroeconomic events with the IS curve: Consider the following changes in the macro economy....

2. Analyzing macroeconomic events with the IS curve: Consider the following changes in the macro economy. Show how these changes affect the IS curve, and explain how and why GDP is affected in the short run.

(d) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they receive a credit that reduces the taxes they pay on corporate income.

(e) U.S. consumers develop an infatuation with all things made in New Zealand and sharply increase their imports from that country.

(f) A housing bubble bursts so that housing prices fall by 20% and new home sales drop sharply.

Expert Solution

Aggregate demand = Consumption + Investment + Government spending + exports - Imports

Rise in aggregate demand will shift IS curve to its right and vice versa.

d) Government offers temporary investment tax credit which will reduce their net tax payable, it will induce many firms to raise their investment level. It will raise aggregate demand and shift IS curve to its right. It will result in rise in rate of interest from "i" to "i1" and output level from "Y" to "Y1".

e) As U.S. increased imports from New Zealand which will result in fall in aggregate demand and shift IS curve to its left from IS to IS1 which will reduce rate of interest from "i" to "i1" as well as output level from "Y" to "Y1".

f) Housing bubble bursts such that price fell by 20% which will raise consumption of new houses and raise aggregate demand. It will raise aggregate demand and shift IS curve to its right. It will result in rise in rate of interest from "i" to "i1" and output level from "Y" to "Y1".

Rahul Sunny answered 2 years ago

Assignment 2 Chapter 3: The Macroeconomic Environment Analyze the role of government in the macro economy,...

Assignment 2 Chapter 3: The Macroeconomic Environment Analyze the role of government in the macro economy, including government macroeconomic policies and the objectives on which they are based. Objectives: - Controlling inflation Economic growth, Reducing unemployment d. A favorable balance of payments e. Controlling public borrowing f. A stable exchange rates Policies: - Functions of government in the economies. Fiscal policies Monetary policy Direct controls *** Follow the assignment guidelines: - (Introduction, Discussion, Review, Suggestion, conclusion & reference)

The Macroeconomic Environment Analyze the role of government in the macro economy, including government macroeconomic policies...

The Macroeconomic Environment Analyze the role of government in the macro economy, including government macroeconomic policies and the objectives on which they are based. Objectives: - Controlling inflation Economic growth, Reducing unemployment d. A favorable balance of payments e. Controlling public borrowing f. A stable exchange rates Policies: - Functions of government in the economies. Fiscal policies Monetary policy Direct controls *** Follow the assignment guidelines: - (Introduction, Discussion, Review, Suggestion, conclusion & reference) do not forget the guidelines

IV. Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates....

IV. Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition. a. In an IS-LM-UIP diagram, show the effect of an increase in foreign output, Y*, on domestic output, Y. Explain in words. b. In an IS-LM-UIP diagram, show the effect of an increase in the foreign interest rate, i*, on domestic output, Y. Explain in words. c. What effect is a foreign fiscal expansion likely...

Consider the following macro model of an economy 8 < : Y = C + I...

Consider the following macro model of an economy 8 < : Y = C + I + G0 C = 12 + 0:6Y I = 5 + 0:2Y (i) Solve for the equilibrium GDP by any method you like. (ii) Specify the government spending multiplier.

Chapter 3: The Macroeconomic Environment Analyze the role of government in the macro economy, including government...

Chapter 3: The Macroeconomic Environment Analyze the role of government in the macro economy, including government macroeconomic policies and the objectives on which they are based. Objectives: - Controlling inflation Economic growth, Reducing unemployment d. A favorable balance of payments e. Controlling public borrowing f. A stable exchange rates Policies: - Functions of government in the economies. Fiscal policies Monetary policy Direct controls *** Follow the assignment guidelines: - (Introduction, Discussion, Review, Suggestion, conclusion & reference)

a. Consider an economy that is characterised by the following Phillips curve: ? = ?- −...

a. Consider an economy that is characterised by the following Phillips curve: ? = ?- − ?(? − ?e ), where ? is unemployment, ?- is the natural rate of unemployment, ? is inflation, ?e is inflation expectations and ? > 0 is a parameter. Suppose that the loss function of the central bank is given by: ?(?, ?) = ? + 3/2 ?2 Agents are assumed to be rational. Compute inflation and unemployment (i) if the central bank commits...

Analyzing the macroeconomic status of a country examines the behaviors within a whole economy. In addition...

Analyzing the macroeconomic status of a country examines the behaviors within a whole economy. In addition to the macroeconomic factors introduced in the reading materials, other components must be considered when analyzing the economic status of a country. The first component is the misery index, which is the unemployment rate and the inflation rate combined. Another consideration is the economic freedom index, which is an exploration of the overall position of a country in comparison to other countries. Finally, there...

B. Moldavia, an open economy initially in LR equilibrium, experiences the following two macroeconomic events: 1....

B. Moldavia, an open economy initially in LR equilibrium, experiences the following two macroeconomic events: 1. The Moldavian government cuts government spending and thereby reduces its budget deficit. 2. International financial markets begin to diversify their portfolios away from Moldavian assets. As a result of these two events, real interest rates in Moldavia do NOT change. Using a three-panel open economy set of diagrams, show the effects of these changes on the LR equilibrium levels of national savings, domestic investment,...

Consider the following information on macroeconomic variables in a closed economy of Winterland (all figures are...

Consider the following information on macroeconomic variables in a closed economy of Winterland (all figures are in billion $): C=160 + 0.6 YD I=150 G=150 T=100 Identify the exogenous and endogenous variables in this model. Obtain the equilibrium level of GDP? Using the equilibrium GDP in b, obtain the equilibrium level of consumption spending. How much is the savinglevel at the equilibrium? Calculate the multiplier? If government purchase of goods and services (G) increase by $50 billion, how much the...

Consider the following economy with: IS curve YIS = k (AP – 123 R); LM curve...

Consider the following economy with: IS curve YIS = k (AP – 123 R); LM curve YLM = 5 (M^s/P) + 499 R ; k = 3.95 ; AP = 5050 ; MS = 1980 . Derive the IS and the LM curves for P = 1.0. Find the interest rate and the output at equilibrium Find the equilibrium interest rates and outputs for the following price levels: 0.8; 1.2; 2.0. Plot the aggregate demand (AD curve) based on your...

Question