Question

In: Economics

QUESTION 1 (2,000 pts) Suppose the Jewett-Stahanczyk-Gonzalez economy can be described by the following values: "C"...

QUESTION 1 (2,000 pts)

Suppose the Jewett-Stahanczyk-Gonzalez economy can be described by the following values:

"C" ̅" = 200",

(" I " ) ̅"= 240" "G" ̅" = 145" "T" ̅" = 160" ("NX" ) ̅" = 100"

mpc = 0.75, c = 5 , d = 30 , x = 15

a) Solve for the equation for the IS curve (call it IS₁). Show at least three lines of derivation.

b) Consider the situation where the goods and services market is in equilibrium. Calculate the real GDP if the real interest rate is 5% (that is, r = 0.05). (Consider this as point A)

c) Consider the situation where the goods and services market is in equilibrium. Calculate the real GDP if the real interest rate is 10% (that is, r = 0.1). (Consider this as point B)

Suppose the government now decides to run a budget deficit of $30 without changing taxes.

d) Solve for the new equation for the IS curve (call it IS₂).

e) Consider the situation where the goods and services market is in equilibrium after the policy change. Calculate the real GDP if the real interest rate is 5% (that is, r = 0.05). (Consider this as point C)

f) Calculate the government spending multiplier.

g) Neatly sketch the IS curves from parts a and e, labeling them IS₁ and IS₂, respectively. Make sure to show points A, B, and C in the diagram

Expert Solution

a). equation for IS₁ is given as follows:

Y = + mpc(Y - T) - c.r + - d.r + G + - x.Y

Y = 200 + 0.75(Y - 160) - 5r+ 240 - 30r + 145 + 100 - 15Y

Y+ 15Y -0.75Y = 200 - 120 - 5r + 240 - 30r + 245

15.25Y = 565 - 35r

Y= 37.04 - 2.29r

b). if r=0.05, then

Y = 37.04 -2.29(0.05) = 36.93 point A

c). if r=0.1,then Y= 36.81 point B

d). Budget deficit of $30 means G - T = 30

G - 160 = 30

G= 190

new IS₂ equation is given as below:

Y = + mpc(Y - T) - c.r + - d.r + G + - x.Y

Y = 200 + 0.75(Y - 160) - 5r+ 240 - 30r + 190 + 100 - 15Y

Y = 40 - 2.29r

e). when r=0.05

Y = 40 - 2.29(0.05) = 39.89 point C

f). government spending multiplier is given as:

Y = G 1/(1- mpc) = 45 1/(1- 0.75) = $180

g).

Rahul Sunny answered 1 year ago

Question 4) Assume an economy that can be described by the following Table 1. Table 1...

Question 4) Assume an economy that can be described by the following Table 1. Table 1 Year Potential GDP Real GDP Price Level 1 $1 020 billion $1 020 billion 100 2 $1 080 billion $1 060 billion 103 Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in Year 1. How can we characterize this position in Year 1? Answer: this position can be characterized Assume in Year 2 that no policy...

Suppose an economy is described by the following relationships: C = a + b(Y-T). Consumption, C,...

Suppose an economy is described by the following relationships: C = a + b(Y-T). Consumption, C, is a function of disposable (i.e., after-tax) income, (Y -T). The terms a and b are parameters. I = c – dR where I is the investment and R is the rate of interest. The terms c and d are parameters. NX = m - ne where I is the net exports and e is the real exchange rate. The terms m and n...

Suppose the Canadian economy can be described as follows: C = 300 + 0.8 Yd (Yd...

Suppose the Canadian economy can be described as follows: C = 300 + 0.8 Yd (Yd is disposable income) I = 165 (investment spending) G = 410 (government purchases) T = 0.25Y (proportional taxes) X=45(exports are constant) M =0.1Y(imports depend positively on our own Y) Calculate the equilibrium Y. Find the government budget balance BB=tY-G, given your Y in (i). Is the government running a surplus or deficit or neither? iii)Now, let’s look at the consumption function C = 300...

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...

Suppose an inflationary economy can be described by the following equations representing the goods and money...

Suppose an inflationary economy can be described by the following equations representing the goods and money markets: C = 20 + 0.7Yd M = 0.4Yd I = 70 – 0.1r T = 0.1Y G = 100 X = 20 Ld = 389 + 0.7Y – 0.6r Ls = 145 where G represents government expenditure, M is imports, X is exports, Y is national income, Yd is disposable income, T is government taxes (net of transfer payments), I is investment, r...

Consider a closed economy described by the following: Y = 2,000 G = 700 T =...

Consider a closed economy described by the following: Y = 2,000 G = 700 T = 500 C = 100 + 0.6(Y – T) I = 750 – 50r a. Find consumption. b. Find the equilibrium interest rate. c. Find investment. d. Find private saving, public saving, and national saving.

Using Keynesian analysis, suppose the economy of Morrisville can be described by the following (all amounts...

Using Keynesian analysis, suppose the economy of Morrisville can be described by the following (all amounts are in millions of dollars): Ca = 15 + .8(Y - 25) Ia = 25 Ga = 25 X-M = 5 (a) The Marginal Propensity to Consume is .8. Explain IN WORDS what this means. (b) In this case, with the MPC = .8, what is the value of the multiplier? (c) Solve for the level of equilibrium income. In words, what does equilibrium...

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....

1. Suppose that the market for coffee can be described by the following demand and supply...

1. Suppose that the market for coffee can be described by the following demand and supply curves (prices are per kg): Qd = 260 ? 5P QS = 8P a) Find the market equilibrium in the absence of taxes. Draw the demand and supply curves, labelling all intercepts and the market equilibrium b) Calculate the values of consumer surplus (CS) and the producer surplus (PS) indicating each of these on the diagram in a). c) Suppose now that the government...

Suppose a closed economy (economy that does not engage in international trade) is described by the following table.

Suppose a closed economy (economy that does not engage in international trade) is described by the following table. Year Potential GDP Real GDP Price Level1 $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 will this policy have on...