Question

Suppose you are given the following macroeconomics data (in million) about an economy:

Aggregate Demand:                                                           AD=C+I+G+NX

Short-run Aggregate Supply (SRAS):                              Y=500P-8,000

Long-run Aggregate Supply (LRAS):                               YFE=$4,000

Where,

5. YFE is real GDP at full employment
6. P is the aggregate price level
7. Consumption spending:                     C=300+0.5(Y-T)-156P
8. Private investment spending, I = $6,000
9. Government spending, G = $900
10. Tax on consumption, T = 0.04*Y    
11. Net export,   NX = - $3,040

1. Find the equation for the AD curve for this economy. (2 points)

2. Find the short-run equilibrium level of real GDP (YSR ) and the aggregate price level (P ). (2 points)

3. Draw a graph representing the AD curve, the SRAS curve, and the LRAS curve. Show all critical points

    and carefully label your graph. Provide a brief comment on this graph. (3 points)

4. Calculate the value of the public saving in the short-run? Is government running a budget surplus or a budget

    deficit? (1 point)

5. Assume further that the aggregate production function is: Y=5*L12 , where L is the number of

    employed labor. Holding everything else is constant, find the value of the productivity level at the long-

    run equilibrium and provide a brief comment on this value. (2 points)

Suppose now the government decides to return this economy to its real GDP at full employment through fiscal

policy (government spending policy).

6. Provide a numerical analysis for this policy. (2 points)

7. Given your answer in question 6, provide an equation for the new Aggregate Demand curve and graph? (2 points)

Answer 1

+

For finding AD curve put C, I, G, NX in AD equation and then solve this for Y by putting AD equal to Y. For equilibrium we just need to solve AD and SRAS equation simultaneously by equating thier Y. In third part after graphing we got YEF is greater than YSR. This implies output is more than full employment, this leads to increase in price and then output will reduce in LR till YEF.

In part(4) we got public saving negative which imply budget is in deficit because both are same thing. Public saving is known as budget surplus.