In the IS curve: y = ̄a − ̄b(r − ̄r) Suppose the parameters are ̄a = 0, ̄b = 1/2, ̄r = 2% and the interest rate is initially r = 3%. Explain what happens to the short-run output gap in each of the following scenarios (consider each separately): 1. The real interest rate rises from 3% to 5%; 2. The real interest rate falls from 3% to 2%; 3. ̄ac decreases by 1.5 percentage points; 4. ̄ag increases by 2 percentage points;

In the IS curve: y = ̄a − ̄b(r − ̄r) Suppose the parameters are ̄a = 0, ̄b = 1/2, ̄r = 2% and the interest rate is initially r = 3%. Explain what happens to the short-run output gap in each of the following scenarios (consider each separately): 1. The real interest rate rises from 3% to 5%; 2. The real interest rate falls from 3% to 2%; 3. ̄ac decreases by 1.5 percentage points; 4. ̄ag increases by 2 percentage points;

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter19: The Keynesian Model In Action

Section: Chapter Questions

Problem 8SQP

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Calculations with the IS curve: Suppose the parameters of the IS curve are a = 0,b = 3/4, r = 2% and the real interest rate is initially R = 2%. Explain whathappens to short-run output in each of the following scenarios (consider eachseparately):(a) Te real interest rate rises from 2% to 4%.(b) Te real interest rate falls from 2% to 1%.(c) ac increases by 1 percentage point.(d) ag decreases by 2 percentage points.(e) aim decreases by 2 percentage points.
2. Suppose a closed economy in the long run is characterized by the following equations: Y =C+I+G Y = Y = 5,000 C= 250+0.75 x (Y -T+Tr) I 1,000-50r G=1,000 T =1,300 Tr 300 Y is total output, Y is potential GDP (full employment output), C is consumption, / is investment, r is the real interest rate (as a whole number, so r 5 is a 5% real interest rate), G is government spending, T is taxes, and Tr is transfer payments. a. Look at the consumption function (the third equation). What is the marginal propensity to consume? What does it mean? What is autonomous consumption? What does it mean? b. Compute the level of consumption spending, private saving, public saving, and national saving. c. Find the equilibrium interest rate r and the associated level of investment spending. Note that the equilibrium interest rate you find will already be given in percentage terms. For example, if you find that r = 8, this mean that the interest rate is 8%. %3D d. Suppose that government spending increases…
12. Consider starting from full-employment equilibrium in our Aggregate Demand and Supply model (with flexible wages and worker misperception of price level changes in the short run), at Po, QN on the output market graph below. Then we get an increase in Aggregate Demand from Agg D, to Agg D1. P LR Agg S SR Agg S. Agg D 1 Agg D. Q We can say that O at P1, Q1, we are in a recessionary gap. O in the long run Q will increase further above Q1 as employment increases (due to workers getting wage increases). O in the long run, P will increase further above P1 as workers finally get a full cost of living raise. ment O none of the other options. al Arts O in the long run, P and Q will return to their original levels when workers perceive the decrease in P. ement
2. Suppose a closed economy in the long run is characterized by the following equations: Y =C+I+G Y = Y = 5,000 C= 250+0.75 x (Y -T+Tr) I 1,000-50r %3D G=1,000 T =1,300 Tr 300 Y is total output, Y is potential GDP (full employment output), C is consumption, / is investment, r is the real interest rate (as a whole number, so r 5 is a 5% real interest rate), G is government spending, Tis taxes, and Tr is transfer payments. a. Look at the consumption function (the third equation). What is the marginal propensity to consume? What does it mean? What is autonomous consumption? What does it mean? b. Compute the level of consumption spending, private saving, public saving, and national saving. c. Find the equilibrium interest rate r and the associated level of investment spending. Note that the equilibrium interest rate you find will already be given in percentage terms. For example, if you find that r 8, this mean that the interest rate is 8%. d. Suppose that government spending increases to…
QUESTION 5 "Suppose the parameters of the IS curve are a=0,b=3/4, and r= 29%. Suppose further that initially the real interest rate R-2%. Draw the diagram for the IS curve and recall ""a"" is a collection of terms (aC, aG, and so on). Suppose the real interest rate rises by 2 percentage points, from 2% to 4%. What will happen to SRO?" O Decrease by 1 percentage point Increase by 1 percentage point Decrease by 2 percentage points Increase by 2 percentage points Decrease by 1.5 percentage points Increase by 1.5 percentage points 000 QUESTION 6 "Suppose the parameters of the IS curve are a 0,b=3/4, and r = 2%. Suppose further that initially the real interest rate R-2%. Draw the diagram for the IS curve and recall ""a"" is a collection of terms (aC, aG, and so on). Suppose the government announces a temporary elimination of the sales tax. As a result, aC increases by 1 percentage point, from 70% to 71%. Assuming the Fed keeps interest rates constant, what will happen to SRO?" Decrease by 1…
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COURSE: MACROECONOMICS - IS-LM MODEL 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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