(1)The following macroeconomic model describes the economy of Sunderland. 1. Y= C + +G+NX 2. C = 220 + 0.63 Y 3. 1 = 1000- 2000R 4. G = Go 5. NX = 525 -0.10Y-500R 6. M (0.1583Y- 1000R)P (a)ls it a fair characterization to refer to equation #2 as a "simple" consumption function? Explain. (b)Derive the expression for equilibrium real output, Y, for this economy. Note: In your final expression for Y, restrict coefficient values to three decimal points. (c) Suppose government spending is 1200 , money supply by the Central Bank is 900 and the price level is 1, find the value of GDP (Y) and equilibrium interest rate (R) for Sunderland. Income Identity Consumption function Investment function Government Expenditure Net export function Money market equilibrium (2)The questions in this section are related to the macroeconomic model of Sunderland. (a)The expression you are asked to derive in question #1b can be considered an aggregate demand curve. Do you agree? Explain your answer. (b)Sketch the graph of this expression for P = 1,2,3,4,5 and label it as AD curve. On the same graph, include a full employment aggregate supply curve consistent with the level of output where P = 1. Show, in the context of this graph, what happens to the price level if the economy experiences a supply shock due to extremely bad weather condition. (c)Briefly explain, with strong theoretical support, the inverse relationship between net export (NX) and Interest rate in the net export function.
(1)The following macroeconomic model describes the economy of Sunderland. 1. Y= C + +G+NX 2. C = 220 + 0.63 Y 3. 1 = 1000- 2000R 4. G = Go 5. NX = 525 -0.10Y-500R 6. M (0.1583Y- 1000R)P (a)ls it a fair characterization to refer to equation #2 as a "simple" consumption function? Explain. (b)Derive the expression for equilibrium real output, Y, for this economy. Note: In your final expression for Y, restrict coefficient values to three decimal points. (c) Suppose government spending is 1200 , money supply by the Central Bank is 900 and the price level is 1, find the value of GDP (Y) and equilibrium interest rate (R) for Sunderland. Income Identity Consumption function Investment function Government Expenditure Net export function Money market equilibrium (2)The questions in this section are related to the macroeconomic model of Sunderland. (a)The expression you are asked to derive in question #1b can be considered an aggregate demand curve. Do you agree? Explain your answer. (b)Sketch the graph of this expression for P = 1,2,3,4,5 and label it as AD curve. On the same graph, include a full employment aggregate supply curve consistent with the level of output where P = 1. Show, in the context of this graph, what happens to the price level if the economy experiences a supply shock due to extremely bad weather condition. (c)Briefly explain, with strong theoretical support, the inverse relationship between net export (NX) and Interest rate in the net export function.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:(1)The following macroeconomic model describes the economy of Sunderland.
1. Y= C +I + G + NX
2. C = 220 + 0.63 Y
3. 1 = 1000- 2000R
4. G = Go
5. NX = 525-0.10Y-50OR
6. M (0.1583Y-1000R)P
(a)ls it a fair characterization to refer to equation #2 as a "simple" consumption function? Explain.
(b)Derive the expression for equilibrium real output, Y, for this economy.
Note: In your final expression for Y, restrict coefficient values to three decimal points.
(c) Suppose government spending is 1200 , money supply by the Central Bank is 900 and the price level
is 1, find the value of GDP (Y) and equilibrium interest rate (R) for Sunderland.
Income Identity
Consumption function
Investment function
Government Expenditure
Net export function
Money market equilibrium
(2)The questions in this section are related to the macroeconomic model of Sunderland.
(a)The expression you are asked to derive in question #1b can be considered an aggregate demand
curve. Do you agree? Explain your answer.
(b)Sketch the graph of this expression for P = 1,2,3,4,5 and label it as AD curve. On the same graph,
include a full employment aggregate supply curve consistent with the level of output where P = 1.
Show, in the context of this graph, what happens to the price level if the economy experiences a
supply shock due to extremely bad weather condition.
(c)Briefly explain, with strong theoretical support, the inverse relationship between net export (NX) and
Interest rate in the net export function.
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