Consider the AD-AS model for a closed economy. If today’s income decreases, the AD curve will...

Consider the AD-AS model for a closed economy. If today’s income decreases, the AD curve will ; the SAS curve will ; and the LAS curve will . Note: For each of the above blanks, fill in one of the following three choices: A. move to the right; B. move to the left; C. stay where it was.

Expert Solution

Decrease in income will decrease the demand for money which means rate of interest will be reduced. This will increase investment spending and it is likely that aggregate demand will be shifting to the right. in the short run there is no change in long run aggregate supply curve or short run aggregate supply curve. During the transition from short run to long and however, short run aggregate supply curve will be shifting to the left, restoring the original equilibrium

AD move to the right

SAS move to the left

LAS state where it was

Rahul Sunny answered 2 years ago

Consider the AS-AD model of a closed economy. a. Write down the expressions for the AS...

Consider the AS-AD model of a closed economy. a. Write down the expressions for the AS and AD curves and interpret the expressions: what is the intuition behind the two curves? What must be true of the model parameters and variables in the long-run equilibrium, i.e. in the steady state? b. Analyse the effects of a supply shock that causes a temporary increase in inflation, using a diagram. Assume that the shock lasts for one period and then assumes the...

Suppose country Zee is a closed economy. Consider AD, SRAS and LRAS for the economy of...

Suppose country Zee is a closed economy. Consider AD, SRAS and LRAS for the economy of Zee. Tye economy begins at price level P0, with output equal potential GDP=Y*, budget is balanced. 3.1 Suppose the government of Zee increases tax, T while keeping government expenditure G unchanged. Are we having budget deficit or surplus? What would be the effect of this action on loanable funds, real interest rate, private savings and investment, and levels of debt in country Zee? 3.2...

Consider a closed economy income-expenditure model of the economy where the country begins in a long-run...

Consider a closed economy income-expenditure model of the economy where the country begins in a long-run equilibrium. • Investment (I) and government spending (G) are ﬁxed: I = 41.5, G = 26. • The income tax rate is t = 6.25%, so tax revenue equals T = tY . • The consumption function is C = 12 + 0.8Yd, where Yd = (1 − t)Y . For the calculations below, write your answers as either a fraction or to two...

Consider the general equilibrium effects of monetary policy in a closed economy. If M decreases, the...

Consider the general equilibrium effects of monetary policy in a closed economy. If M decreases, the IS curve will ; the FE curve will ; and the LM curve will ; and r* will and y* will . Note: For each of the above blanks, fill in one of the following three choices: A. move to the right; B. move to the left; C. stay; D. increase; E. decrease.

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C...

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C = 100 +0.8(Y – T); taxes are T = 380; investment, I, is 300 and government expenditure, G, is 200. (a) Calculate the multiplier, equilibrium income and the government budget surplus [6 marks] (b) Now let taxes, T = 10 + 0.25Y. Recalculate the multiplier, equilibrium income and the government budget surplus. Try to explain any differences between your answers and your answers to...

6. The income-expenditure model Consider a small economy that is closed to trade, so its net...

6. The income-expenditure model Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption function, where C is consumption, Y is real GDP, I is investment, G is government purchases, and T stands for net taxes: C = 45+0.75×(Y – T) Suppose G = $60 billion, I = $60 billion, and T = $20 billion. Given the consumption function and the fact that for a...

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C...

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C = 100 +0.8(Y – T); taxes are T = 380; investment, I, is 300 and government expenditure, G, is 200. ( a)Calculate the multiplier, equilibrium income and the government budget surplus [6 marks] (b)Now let taxes, T = 10 + 0.25Y. Recalculate the multiplier, equilibrium income and the government budget surplus. Try to explain any differences between your answers and your answers to part...

(32 marks total) Consider the AD-AS model of chapter 9, with the AD curve derived from...

(32 marks total) Consider the AD-AS model of chapter 9, with the AD curve derived from the quantity theory of money. Suppose the economy is initially in long-run equilibrium, when there is a sudden rise in demand for real balances for any given level of output, and simultaneously also an improvement in productive technology that permanently increases how much firms can produce with any given amount of the factors of production. (a) Immediately following these shocks, what happens to velocity?...

Consider the closed economy Classical model depicted below, where consumption depends positively on disposable income and...

Consider the closed economy Classical model depicted below, where consumption depends positively on disposable income and negatively on the real interest rate. 1) Suppose the government decides to reduce the overall level of taxes. What happens to public savings (Spublic), private savings (Sprivate), and total savings (S)?. 2) ) According to the Classical model, what are the long-run implications of the above change on the real interest rate (r), output (Y), and the expenditure components of output consumption (C), investment...

1.(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains...

1.(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains well, and describe under what conditions the Phillips curve fails to explain economic behavior. Include graphs of the Phillips curve and the AD/AS model in your answer 2.(ii) In the late 1990s, the U.S. economy experienced a period of extremely low inflation and extremely low unemployment. Use the AD/AS model to explain what sort of change in the economy would cause this. Include a...

Question

Consider the AD-AS model for a closed economy. If today’s income decreases, the AD curve will...

Solutions

Expert Solution

Related Solutions

Consider the AS-AD model of a closed economy. a. Write down the expressions for the AS...

Suppose country Zee is a closed economy. Consider AD, SRAS and LRAS for the economy of...

Consider a closed economy income-expenditure model of the economy where the country begins in a long-run...

Consider the general equilibrium effects of monetary policy in a closed economy. If M decreases, the...

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C...

6. The income-expenditure model Consider a small economy that is closed to trade, so its net...

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C...

(32 marks total) Consider the AD-AS model of chapter 9, with the AD curve derived from...

Consider the closed economy Classical model depicted below, where consumption depends positively on disposable income and...

1.(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains...