Question
In: Economics
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, and
h is a parameter
measuring the sensitivity of money demand to the interest rate.
Assume that the
price level is fixed at P = 1.
(a) Assume that h=20. If government spending is G=20, taxes are
T=10, and
the money supply is M=300, find the equilibrium levels of output
and the
interest rate.
(b) Now assume that government spending decreases to 10. What is
the
multiplier? Is the effect of government spending on output
increased or
decreased when h is larger? Explain your answer intuitively.
(c) Now suppose taxes decrease to 0. What is the multiplier? Will
the
multiplier be different than your answer in part (b)? Explain
intuitively.
i am having trouble with b and c. could you do them in detail mainly the multipliers
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
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...
Question 1. In a closed economy, the consumption function is given by C = 200 +...
Question 1. In a closed economy, the consumption function is
given by C = 200 + 0.75(Y-T). The investment function is I = 200 –
25r. Government purchases and taxes are both 100. The money demand
function in the economy is (M/P)d = Y – 100r. The money supply M is
1,000 and the price level P is 2.
a. Derive the equations of IS and LM curves.
b. Find the equilibrium interest rate r and the equilibrium
level of...
In a closed economy, given the following: The consumption function C = 0.8(1 – 0.25) Y...
In a closed economy, given the following:
The consumption function C = 0.8(1 – 0.25) Y +
12
The average tax rate t = 25%
The level of private investment I = 26
The level of government spending G = 14
Where Y is the national income.
Calculate the equilibrium level of income and output in the
economy.
Calculate the expenditure multiplier and show the effect
of
an increase in government spending and
an increase in private investment.
Given the...
Suppose a closed economy has an aggregate consumption function given by C = 200 + 0.50Yd and generates $2400 output and income in equilibrium
2Suppose a closed economy has an aggregate consumption function
given by C = 200 + 0.50Yd and generates $2400 output and income in
equilibrium. Suppose also that the government collects a lump-sum
tax of 100.How much will the private sector be saving total in
equilibrium?3Suppose a closed economy generates $2500 output and income in
equilibrium. Suppose also that the government spends 350 and
imposes a lump-sum tax of 100.By how much is the government in deficit?
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...
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...
(b) Consider an economy where the consumption function is given by ? = 500 + 0.8(?...
(b) Consider an economy where the consumption function is given
by ? = 500 + 0.8(? − ?). Investment is given by 2000 − 100? (where
? is the real interest rate), government spending is 5000, taxes
are equal to 4000. Exports are 1000, while imports are given by ??
= 0.2?.
(i) Suppose that the real interest rate is ? = 5. Calculate the
equilibrium level of real GDP for this economy. Now suppose that
the Fed decides to...
Consider the following closed Keynesian economy: Desired consumption and investment are given by: Cd = 200+0.8(Y...
Consider the following closed Keynesian economy:
Desired consumption and investment are given by:
Cd = 200+0.8(Y −T)−500r
Id = 200 − 500r. Taxes and government expenditures are given
by
The real money demand is
T = 20+0.25Y G = G=196.
Md
P = 0.5Y − 250(r + πe).
The money supply M = 9890 and the expected inflation πe =
0.10.
(a) Derive the equations for the IS and LM curves and show them on
a (Y, r) graph.
(b)...
Assume that GDP (Y ) is 5,000 in a closed economy. Consumption (C) is given by...
Assume that GDP (Y ) is 5,000 in a
closed economy. Consumption (C) is given by the equation C =
1,200+0.3(Y −T)−50r, where r is the real interest rate, in percent.
Investment (I) is given by the equation I = 1, 500 − 50r. Taxes (T
) are 1,000, and government spending (G) is 1,500.
(a) What are the equilibrium values of
C, I, and r?
(b) What are the values of private
saving, public saving, and national saving? (...
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...
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