Changes in government spending will have a greater effect on output when the demand for money is very sensitive to changes in the level of output. Graph
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COURSE:
Comment on the following statements:
1.- Changes in government spending will have a greater effect on output when the demand for money is very sensitive to changes in the level of output. Graph
2.- Demonstrate under the assumptions of the IS-LM model the effect of having a consumption function with an exogenous component, an income-dependent part and a part that depends on the interest rate. Graph
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- COURSE: MACROECONOMICS - IS-LM and/or MUNDELL FLEMING MODELS Refer to 2 different models (and/or conditions) under which an increase in the amount of money circulating in the economy has a NULL impact on GDP. Then, refer to 2 different models (and/or conditions) under which an increase in the amount of money circulating in the economy has a MAXIMUM impact on GDP. EXPLAIN very briefly the mechanism by which each model generates that NULL or MAXIMUM impact on GDP. Hint: 2 conditions under increase of M (money) and how impact null (zero) and maximum on GDP. Example, considering both fiscal or monetary policies or liquidity trap model. Please graph and explain on detail both cases.Suppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…Exercise 11.11 Optional: Suppose the central bank's monetary policy sets the interest rate accord- ing to the function: i = 3.0+2.0(T – T*) with a* = 4.0, and aggregate expenditure is the sum of: C= 200+0.75Y I = 85 – 2i G= 100 X – IM = 50 -0.15Y-3i (a) What is the equation for the ADA curve? (b) Plot the ADn curve in a diagram, not necessarily to scale, that shows the horizontal intercept and slope of the curve.
- Course: Introduction to Microeconomics Topic: Intertemporal Consumption DecisionsA consumer makes decision to consume in this year and next year. This year she has an income of M1 = $ 1.5 million and next year her income will be M2 = $ 2.75 million. Interest rate is 10%. Her intertemporal preferences are represented by function U(c1, c2) = c1*c2, whose intertemporal marginal rate of substitution is IMRS = c2/c1.a) Find and graph Budget Constraintb) Find and graph optimal consumption basket and indicate whether the consumer SAVES or BORROWS in the FIRST YEAR.c) Indicate whether following statement is true or false: "Any increase in interest rate will cause a decrease in consumer's welfare" Justify.d) If next year's income is maintained, how much would this year's income have to be for consumer to neither save nor borrow money at 10% interest rate?e) How much would interest rate have to be for consumer to consume exactly her initial endowment (M1 = $ 1.5 million and M2 = $ 2.75…2. Suppose, C=0.8(1-t)Y • t=0.25 •| = 900 – 50i • G=800 a) What is the equation for lIS curve b) What is the effect of increase in govt. expenditure by 100 on the IS equation & IS curve? Show the effect using graphs c)What will happen to the slope of IS curve if Investment becomes more sensitive to interest, say | = 900 – 60i ?09. Consider the following model. Expenditure is given by: E=C+I+G The consumption function is specified as: C=c₁+cY We assume a closed macroeconomic system so that: Y=E Which is the correct representation of income as a function of autonomous expenditures and the marginal propensity to consume? a. b. C. Y= d. Y= Co+I+G 1-c I+G 1-c-c Y= (I+G). Y=I. 1-c 1
- Suppose that one day your rich aunt unexpectedly gives you $10,000 to use as you like, no strings attached. A fraction of that gift will be consumed (the marginal propensity to consume, MPC) or saved (the marginal propensity to save, MPS). If you are like the "average American," you will save less than 5% of your $10,0002. The money you don't save is consumed and is spent on purchasing goods and services. So, whether you spend the increased income on food, entertainment, paying off loans, or a new bicycle, that money goes back into the economy, where it generates revenue through taxes, and gets spent again. This is because an injection of extra income leads to more spending, which creates more income, and so on. In this way, your money is actually spent many times and it has the effect of stimulating the economy through what is known as the multiplier effect. Gifts from rich aunts are not the only way to stimulate the economy. Governments occasionally provide an economic stimulus by…Course: Microeconomics - Intertemporal Consumption Decisions Consider a person who consumes in the 2 periods (C1 and C2), but ONLY works and earns an income in the first period (C1). Assume that consumption in each period behaves as a normal good.a) What is the effect of a rise in income on welfare? And on consumption in both periods? GRAPHb) What is the effect of a rise in the interest rate (assume that r goes from 10% to 15%) that occurs before the consumption decisions on welfare? GRAPH and on consumption in both periods?) GRAPH12. Economic models Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P=A×MP=A×M • P=Price LevelP=Price Level • M=Money SupplyM=Money Supply • A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level? A- An economist would look for data on past changes in the money supply and note the resulting changes in the price level. B- Economists do not usually develop theoretical models of the economy but only analyze summary statistics about the current state of the economy. C- Unlike researchers in the hard sciences, economists cannot study complex relationships using…
- In a hypothetical economy, no investment projects are undertaken when the real interest rate is 12 percent or above, 40 projects worth $1 million each are undertaken when the real interest rate is 10 percent, and 40 more projects worth $1 million each are undertaken every time the real interest rate falls by 2 percent until it reaches a value of zero. a. Draw a graph showing the investment demand curve. Plot 7 points in total using the line tool (investment demand curve) given below. Investment Demand Curve 14 Tools 12 investment de 10 8. 6. 4. 40 80 120 160 200 240 280 Investment (2017 $ million) b. If the real interest rate is 6% then $ million of investment will take place in this economy. c. If the real interest rate rises to 4% then investment (Click to select) V to $ million. Real Rate of Return and Interest (%)Consider the impact of a cut in the interest rate set by the central bank (the "policy rate"), which causes banks to lower interest rates for both borrowers and lenders. Select one or more: U a. Borrowers like Julia will definitely be better off O b. Borrowers like Julia will definitely increase their current consumption O c. If Marco is a saver (not an investor) he will definitely be worse off O d. If Marco is a saver he will definitely decrease his consumptionQuestion 8 Which of the following is correct as an interpretation of the Keynesian consumption function? None of the others is correct O The Keynesian consumption function implies that your consumption depends on your overall wealth, rather than your current income. O The Keynesian consumption function states that as income increases consumption increases more than proportionately. The Keynesian consumption function is consistent with the observation that consumption can increase even if disposable income remains the same. The Keynesian consumption function predicts that if your current income is less than your expected future income, you should borrow today to finance your current consumption needs.