Question

In: Economics

Suppose in a closed economy, the price is fixed and firms produce as much as demanded...

Suppose in a closed economy, the price is fixed and firms produce as much as demanded in the short run. The economy is originally in a general equilibrium. Now consider the case if its central bank tightens money supply (here tightening means reducing).

Please simply answer what happen to consumption (C) and national saving (S) in the short -run equilibrium, and what happen to P in the long run equilibrium.

Solutions

Expert Solution

As the money supply is tightened the consumer spending will contract and hence the consumption will be lower as for National saving since it is a function of gdp-consumption-government purchase for closed economy and as consumption will contract National Saving will increase.

Price in the long run will come down since the consumption is lower and which will in effect cause the price to decrease.

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

Consider a closed economy with no government, a fixed price level, a fixed interest rate and...
Consider a closed economy with no government, a fixed price level, a fixed interest rate and the following characteristics: Autonomous part of consumption expenditure = $10B Investment = $30B Equilibrium GDP = $200B a.  What is autonomous expenditure at equilibrium? (2) b. What is induced expenditure at equilibrium? (2) Now suppose that investment increases to $50B. c. What is the new level of Equilibrium GDP? (2) d. What is the value of the multiplier? (2) e.  Briefly explain the process of convergence...
4.Consider the closed-economy IS-LM model. This is the short-run Keynesian fixed-price model. Suppose there is an...
4.Consider the closed-economy IS-LM model. This is the short-run Keynesian fixed-price model. Suppose there is an increase in government expenditure financed by an increase in T. Examine the effect of this change on the endogenous variables of the model and explain your results.
Consider a closed economy with a fixed price: Consumption function: ? = 1+(3/4)(? − ?) Investment...
Consider a closed economy with a fixed price: Consumption function: ? = 1+(3/4)(? − ?) Investment function: ? = 10 Money demand function: (M/P) = ? − 2? Tax and government spending: ? = ? = 12 Money supply: ? = 500 Where C is consumption, Y is production, I is investment, ? is real interest rate expressed in percent, ? is tax, ? is government spending, ? is money supply. The price level of this economy is fixed at...
V+Consider a closed economy with fixed prices and wages. Suppose the consumption function is given by...
V+Consider a closed economy with fixed prices and wages. Suppose the consumption function is given by ? = 50 + 0.5? ? where C is consumption and ? ? is disposable income. The investment function is given by ? = 30 − 5? where I is investment and r is the interest rate. The demand for money is given by ?/? = 200 + 2? − ℎ? where M is the amount of money demanded, P is the price level,...
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high...
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high average rate of time preference relative to economy B’s low average rate of time preference. (1) Describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) Describe what would occur if these countries were open to international capital flows. (This is the key to answering Bernanke’s question)
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high...
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high average rate of time preference relative to economy B’s low average rate of time preference. (1) Describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) Describe what would occur if these countries were open to international capital flows. (This is the key to answering Bernanke’s question)
Suppose a closed economy (economy that does not engage in international trade) is described by the...
Suppose a closed economy (economy that does not engage in international trade) is described by the following table. Year Potential GDP Real GDP Price Level 1 $1600 billion $1600 billion 100 2 $1650 billion $1620 billion 109 a. What problem will occur in the economy in Year 2 if no policy is pursued? b. Describe the fiscal policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact...
Suppose a closed economy (economy that does not engage in international trade) is described by the...
Suppose a closed economy (economy that does not engage in international trade) is described by the following table. Year Potential GDP Real GDP Price Level 1 $1600 billion $1600 billion 100 2 $1650 billion $1620 billion 109 a. What problem will occur in the economy in Year 2 if no policy is pursued? b. Describe the fiscal policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact...
Suppose that two identical firms produce widgets and that they are the only firms in the...
Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by C1 = 60 Q1 and C2 = 60 Q2 where Q1 is the output of Firm 1 and Q2 is the output of Firm 2. Price is determined by the following demand curve: P= 2100 − Q where Q=Q1+Q2 Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium. (For all of the following, enter...
Suppose that two identical firms produce widgets and that they are the only firms in the...
Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by C1=60Q1 and C2=60Q2 where Q1 is the output of Firm 1 and Q2 is the output of Firm 2. Price is determined by the following demand curve: P=2700−Q where Q=Q1+Q2 Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium. (For all of the following, enter a numeric response rounded to two decimal places.) When...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT