1. The following equations describe an economy: Consumption : C = 30 + 0.9YD Investment :...

1. The following equations describe an economy:

Consumption : C = 30 + 0.9YD

Investment : I = 500 - 14i

Government Spending : G = 200

Transfer Payments: TR = 200

Taxes: TA = 0.2Y

LM Curve : Y = 2,500 + 100i

Re al Money Demand : L = kY - hi

Money Suppy : MS = 1,500

Price Level: P = 2

where Y is income, i is the percentage of interest rate, YD is the disposal income, and k and h are parameters that govern the real money demand.

(a) [ 8 points] What are the values of (i) marginal propensity to consume out of disposal income and (ii) marginal propensity to consume out of total income? Show your work.

(b) [12 points] Derive the IS equation for the economy. Show your work.

(c) [12 points] Find the values of (i) k and (ii) h that are consistent with the money market equilibrium. Show your work.

(d) [ 8 points] What is the value of h when the economy is in a liquidity trap? Explain your answers.

(e) [10 points] What is the value of h when the economy is in a “Classical” case? In this case, is there going to be a crowing-out effect associated with an increase in government spending? Explain your answers.

(f) [20 points] Solve for the equilibrium levels of (i) output, (ii) interest rate, (iii) consumption, (iv) investment and (v) government budget surplus. Show your work.

(g) [12 points] Derive the aggregate demand (AD) curve for the economy. Show your work.

(h) [ 8 points] Suppose that the money supply is increased from 1,500 to 4,500. What would be the new price level that will keep the equilibrium interest rate and income as in part (f) unchanged? Explain your answers.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Suppose the goods-market of the economy of Macronium is described by the following equations Consumption: C...

Suppose the goods-market of the economy of Macronium is described by the following equations Consumption: C = 400 + 0.80 Yd where Yd refers to disposable (post-tax) income. Government collects lump-sum taxes at the amount 250 units, i.e. Taxes T = 250 Investment demand is given by Investment: I = 250 -500r Government purchases has two components: 1- Lump Sum government purchases at G' = 50 2- A proportional component g: 10% of the output, i.e. gY= 0.10Y Hence, total...

Assume the following set of equations describe the economy of Agriland: Consumption = $100 billion +...

Assume the following set of equations describe the economy of Agriland: Consumption = $100 billion + .6YD YD refers to disposable income Investment = $90 billion Government spending = $70 billion Taxes = .25Y Exports = $65 billion Imports = 0.1Y Calculate the equilibrium level of output for Agriland? (Show formula and calculations) Calculate the multiplier for Agriland. (Show formula and calculations) What is the impact on the equilibrium level of output in Agriland of an increase in government spending...

Consider the following equations that describe a closed economy with no government. Assume consumption is represented...

Consider the following equations that describe a closed economy with no government. Assume consumption is represented by the following: C = 200 + 0.9Y. Also assume that planned investment (I) equals 300. Obtain the saving function for this economy. What are the marginal propensity to save (MPS) and marginal propensity to consume (MPC)? Write the equation for the planned aggregate expenditure. Find the equilibrium level of output and calculate the level of consumption and saving that occurs at the equilibrium...

Suppose that the following equations describe an economy. C = 170 + 0.60YD MS = 735;...

Suppose that the following equations describe an economy. C = 170 + 0.60YD MS = 735; P = 1 T = 200 I = 100 - 4i Md = 0.75Y - 6i G = 350 a) Write down the equilibrium condition for the goods market (IS curve) (2 points) b) Write down the equilibrium condition for the Money market (LM curve) (2 points) c) Find the equilibrium values of interest rate (i) and output (Y) (2 points) d) Find the...

Consider an economy in which the consumption, investment and production functions are as follows C =...

Consider an economy in which the consumption, investment and production functions are as follows C = 10 + 0.8(Y - T) I = 40 - 2.5r F(K,L) = K1/3 L2/3 Suppose government spending is 20, taxes equal 25 and the supply of factors is KS = LS = 125. Answer the following questions. What is the equilibrium level of real GDP.? What is the equilibrium real interest rate? Find the level of national savings. How much of that savings is...

Consider an economy with the following components of aggregate expenditure: Consumption function: C=20 + 0.8YD Investment...

Consider an economy with the following components of aggregate expenditure: Consumption function: C=20 + 0.8YD Investment function: I = 30 Government expenditures: G = 8 Export function: X= 4 Import function: M=2 + 0.2Y Tax rate, t = 0.2 or 20%. Answer the following question. What is the marginal propensity to consume in this economy? What is the equation of the aggregate expenditure function in this economy? Determine the size of the autonomous expenditure multiplier. Determine the size of the...

The following equations describe an economy. (Think of C, I, G, etc., as being measured in...

The following equations describe an economy. (Think of C, I, G, etc., as being measured in billions and I as a percentage; a 5 percent interest rate implies I=5). C = 0.8 (1 – t) Y t = 0.30 I = 1000 – 50 i G= 500 L = 0.25Y – 65 i M/P = 700 Derive the IS equation. AD = C + I + G + NX AD = 0.8 (1 – t) Y...

Suppose that the following equations describe an economy (C,I,G,T, and Y are measured in billions of...

Suppose that the following equations describe an economy (C,I,G,T, and Y are measured in billions of dollars, and r is measured as a percent; for example, r = 10 = 10%): C = 170+.6(Y-T) T = 200 I = 100-4r G = 350 (M/P)d= L = .75Y – 6r Ms/P = M/P = 735 a. Derive the equation for the IS curve and explain all your work. (Hint: It is easier to solve for Y here.) b. Derive the equation...

In a hypothetical economy desired consumption and desired investment are: C^d = 184 + .6Y-500r ...

In a hypothetical economy desired consumption and desired investment are: C^d = 184 + .6Y-500r and I^d = 200 -500r Government purchases are 196. Real money demand is M^d/ P = 0.5Y - 250 ( r + pi^e) where expected inflation, pi^e, is 0.10. The nominal money supply is 9890. a. If full employment output is Y bar =1000, what are the general equilibrium values of the real interest rate, price level, consumption and saving? b. What is the value...

1. A closed economy is described by the following behavioral functions: Private Consumption C = 80...

1. A closed economy is described by the following behavioral functions: Private Consumption C = 80 + 0.8YD Private Investment I = 180 – 10i Public Expenditure G = 200 Rate of Income Tax t = 0.25 Transfers TR = 25 Real Demand for Money L = 0.48Y – 12i Money Supply (in real terms, P=1) M/P = 384 Full Employment Income YP = 1200 a) Find the equilibrium level of income, the interest rate and the public budget balance....

Subjects