Suppose that the unemployment rate is currently 4.0%. If the government increases tax rates (ceteris paribus),...

Suppose that the unemployment rate is currently 4.0%. If the government increases tax rates (ceteris paribus), what will happen? Answer your question using Keynesian economics.
1. RGDP will fall
2. RGDP will rise
3. RGDP will stay the same
4. RGDP could increase or stay the same
5. RGDP could decrease or stay the same

Suppose that people expect the prices of housing to rise. This will cause…
1. Demand and supply for housing to increase
2. Demand and supply for housing to decrease
3. Demand for housing to increase; Supply for housing to decrease
4. Demand for housing to decrease; Supply for housing to increase

Ceteris paribus, an increase in housing foreclosures causes housing prices to…
1. Increase
2. Decrease
Suppose the minimum downpayment on a house is currently 5%. But, the government suddenly passes a law making the minimum downpayment 25%. How will this affect the demand for housing? Explain.

Expert Solution

Ans 1: (A) RGDP will fall because increase in tax rates would cause the aggregate demand to fall and the curve shift to left, which causes decline in price and real GDP level.

Ans 2: (C) Demand for housing to increase; Supply for housing to decrease (because people expect the price of housing will rise in future, so they will demand more for housing now. This increases demand for housing. The sellers expect the price of houses to rise in future, so they will decrease the supply and wait for the price to rise in future, hence the supply of houses falls).

Ans 3: (B) Decrease. This is because now the lender can take the collateral if the borrower stops paying the loan. This decreases the demand for housing and causes the price of housing to fall.

Ans 4: This means the buyers have to make more money as a downpayment. This would decline the demand for housing as not all buyers would be able to pay 25% as downpayment. So, the demand for house will fall. The demand curve for houses will shift to left, which causes a decline in equilibrium price and quantity of houses, keeping other factors constant.

Rahul Sunny answered 1 year ago

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