Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 21, Problem 11PA
Subpart (a):
To determine
Equations describing the economy.
Subpart (b):
To determine
Equations describing the economy.
Subpart (c):
To determine
Equations describing the economy.
Subpart (d):
To determine
Equations describing the economy.
Subpart (e):
To determine
Equations describing the economy.
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Consider an economy described by the following equations:
Y=C+I+G
C=100+.75(Y−T)C=100+.75(Y−T)
I=500−50rI=500−50r
G=125G=125
T=100T=100
Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest.
Questions:
a. What is the value of the multiplier?
b. What is the equilibrium equation for Y? Show solution.
c. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent,so r=4. What is the value of output?
d. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output.
e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.
Question
Consider an economy described by the following equations:
Y = C+I+G
C = 100+0.75 (Y-T)
I = 500-50r
G = 125
T = 100
where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP would be 2,000.
What is the marginal propensity to consume in this economy?
Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?
Assuming no change in monetary policy, what change in government purchases would restore full employment?
Assuming no change in fiscal policy, what change in the interest rate would restore full employment?
Consider an economy described by the following equations:
Y=C+I+G
C=100+.75(Y−T)C=100+.75(Y−T)
I=500−50rI=500−50r
G=125G=125
T=100T=100
Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest.
Questions:
d. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output.
e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.
Chapter 21 Solutions
Principles of Macroeconomics (MindTap Course List)
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