a. Derive the General Equilibrium simultaneous equation for economy Z. Further comment on the economic interpretations of this simultaneous General Equilibrium equation with reference to both the goods market and money market. b. Calculate the equilibrium values of output (Y) and interest rate (r). c. Derive the fiscal multiplier (KG), lump-sum taxation multiplier (KT) and the monetary policy multiplier (KM) for economy Z. Calculate their sizes and discuss the relative effectiveness of monetary policy over fiscal policy with reference to all parameter strengths in economy Z. d. Discuss the impact of the 'crowding out' effect on this fiscal multiplier (K) and thus the changes in the interest rate from changes in output for economy Z. When fiscal policy is expansionary, how can the 'crowding out' effect be counteracted or removed with reference to economy Z?

a. Derive the General Equilibrium simultaneous equation for economy Z. Further comment on the economic interpretations of this simultaneous General Equilibrium equation with reference to both the goods market and money market. b. Calculate the equilibrium values of output (Y) and interest rate (r). c. Derive the fiscal multiplier (KG), lump-sum taxation multiplier (KT) and the monetary policy multiplier (KM) for economy Z. Calculate their sizes and discuss the relative effectiveness of monetary policy over fiscal policy with reference to all parameter strengths in economy Z. d. Discuss the impact of the 'crowding out' effect on this fiscal multiplier (K) and thus the changes in the interest rate from changes in output for economy Z. When fiscal policy is expansionary, how can the 'crowding out' effect be counteracted or removed with reference to economy Z?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

a. Derive the General Equilibrium simultaneous equation for economy Z.
Further comment on the economic interpretations of this
simultaneous General Equilibrium equation with reference to both the
goods market and money market.
b. Calculate the equilibrium values of output (Y) and interest rate (r).
c. Derive the fiscal multiplier (KG), lump-sum taxation multiplier (KT) and
the monetary policy multiplier (KM) for economy Z. Calculate their
sizes and discuss the relative effectiveness of monetary policy over
fiscal policy with reference to all parameter strengths in economy Z.
d. Discuss the impact of the 'crowding out' effect on this fiscal multiplier
(K) and thus the changes in the interest rate from changes in output
for economy Z. When fiscal policy is expansionary, how can the
'crowding out' effect be counteracted or removed with reference to
economy Z?

Consider the following behavioural relations for the closed 'economy Z'
where in the short run, the price level is fixed:
C = Co + C₁ (Y-T-t Y)
where T represents lump sum taxation and t represents the mean
proportional taxation rate in economy Z.
Exogenous government spending is given as:
The aggregate investment schedule is given as, where r is the
equilibrium interest rate:
Ms
G = G
I=-1₁ r + Io
Money market equilibrium is equal to:
Ma
P P
= -h r+k Y

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