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- 12. Use the classical model of a closed economy to predict how each of the following shocks should affect a nation's real aggregate income (Y), national saving (S), investment (1I), and interest rate (r). Be sure in each case to clearly state your predicted direction of change (up, down, or no change) for all four variables and illustrate your predictions for S, I and r with a supply/demand diagram for the loanable funds market. a. The size of the labor force shrinks (L decreases) b. Technological innovation increases total factor productivity (A increases) c. The government cuts taxes (T decreases) d. Autonomous investment (io) decreases.1. Differentiate policy action from policy result.3. Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) I = 400 – 15r M/P = 200 + Y – 100r P G = 150 T = 100 M = 2000 P=2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. c) The government reduces taxation to T=50 in order to boost economic activity. Assume no changes in the values of all the other variables. 1. What is the immediate increase in income before the economy adjusts to its new equilibrium? 2. What are the economy's equilibrium level of output Y and interest rate following the cut in taxation? Compute the equilibrium level of consumption and investment spending. With the help of the IS/LM graph, carefully explain what happens to the economy following the cut in taxation.
- Does Keynesian economics require government to set controls on prices, wages, or interest rates?2. Use the open economy macro model (the one with 3 diagrams) to illustrate the con- sequences of a crisis in all other countries in the world that makes foreigners want to bring all of their money into the United States. Make sure you tell me the following: (a) Draw the diagrams properly. (b) Tell me which curve or curves move. (c) Tell me which direction the curve or curves move in. (d) Tell me what happens to Savings in equilibrium. (e) Tell me what happens to Investment Plus Net Capital Outflow in equilibrium. (f) Tell me what happens to the Real Interest Rate in equilibrium. (g) Tell me what happens to Net Capital Outflow in equilibrium. (h) Tell me what happens to Net Exports in equilibrium.3. If the economy is at the natural rate of unemployment with the level of real GDP at potential output, what would expansionary fiscal or monetary policy do to the economy? How would the economy be affected in the short run and long run?
- 9. In response to the Great Recession, the Federal Reserve took drastic and largely untested measures to stabilize both the financial system and the macro- economy. These measures caused the monetary base to increase from approximately $850 billion to over $4 trillion. What would an economist from each of the following viewpoints-classical, Keynesian, monetar- ist, real business cycle, Great Moderation consensus, and secular stagnationists-predict about the effect of these policies, and why? Indicate whether each school would support the Fed's actions.4. Why did inflation targets replace monetary targets as the most widely used strategy for monetary policy in advanced economies?5. Suppose an economy is hit by a flood and its natural resources decreases. a) Show graphically using AD-AS model how the price level and output are affected in the short-run. b) Can the government use monetary policy to offset the effects on price level and output, explain?
- Chapter 3: Supply and Demanc x Checkout | Chegg.com Quiz List - Principles of Macro X Ims/quizzing/user/attempt/quiz_start_frame_auto.d2l?ou=8698368&isprv=&drc=0&qi=9643220&cfql=0&dnb=0&fromQB=0 2 - Demand and Supply Ebraam Awad:Attempt 1 Consider the demand for a good illustratèd in the figure below. Suppose the price of a complement decreases. What effect would this have in the graph? p. Price po Do Qo Quantity O This would result in the demand curve shifting to the left. This would result in a slide down the demand curve. This would result in a slide up the demand curve. This would result in the demand curve shifting to the right. MacBook Pro G Search or type URL 24 &3.) Consider the following IS-LM model: Goods Sector: Y=C+I+G C = 240 + 1.5Y I = 260 - 500R G = 100 Financial Sector: MD = M₂ MD = 0.2Y - 150R Ms = 210 Where R = Interest Rate, Mr and Ms are demand and supply for money. a.) Identify the exogenous variables. b.) Describe the two equilibrium conditions (one per sector). c.) Use Cramer's Rule or Matrix Inversion to find the equilibrium values of income and interest rates. (Hint: Construct a system of two equations in matrix form with only income and interest rate as the unknown variables.) d.) Find the equilibrium values of all other endogenous variables by substituting your answers in (3c) to the given good sector equations above.1. What are so-called heterodox adjustment programs? Are they a sound long-term approach? 2. Use the IS/LM/BP graph to illustrate the effects of a revaluation. Show the fiscal and monetary policy changes that would make it more likely that a revaluation will succeed in eliminating a payments surplus.