Assume that a government cuts its expenditure and therefore runs a pul What will this mean for the equilibrium national income? What will this mean for the demand for money and to interest rat Under what circumstances will it lead to a (i) decrease in money s in money supply? What effect will each of the two scenarios in (III) will have on compared with its original level?
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- Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to known as the by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD₁ and AD₂. You can see the slopes of AD₁ and AD₂ by selecting them on the graph.What is the impact of monetary and fiscal policy if (a) money demand does not depend on income, LM curve is horizontal; and (b) If money demand is extremely sensitive to interest rate, LM curve is horizontal.In the economy, if the Central Bank rediscount rate, in this case, equality in the economy How will interest and national income change? Draw a graph and explain. Answer this question according to the following three conditions. A) The situation where the interest rate elasticity of the investment is low B) The situation where the interest rate elasticity of the investment is high C) The situation where the interest elasticity of the investment is zero
- Given the equations of an economy: C= 10 + 0.75 Yd where C stands for consumption and Yd stands for disposable income T=0.2 Y where T stands for Tax and Y for income G=230, where G stands for Government expenditure I=280-6i where I stands for Investment and i for interest L=0.4Y-4i, where L stands for the demand for real balances M=800, where M stands for nominal money supply P=2, where P stands for the price level Calculate the budget surplus and If government spending were to increase by 10, what would be the change in the rate of interest, the level of investment and the level of income?Consider an economy with the following features: Consumption, C = 130 + 0.5 Yd Income tax, T= 20 + 0.2 Y Investment, |= 200 – 60Or Government expenditure, G= 112 Real money demand, Ma/P= 50 + 0.5 Y – 600r Nominal money supply, Ms = 600 %3D Price level, P= 2 where Yd stands for disposable income, and r for the rate of interest. i. Derive the IS and LM equations. ii. Calculate the equilibrium levels of income and rate of interestConsider the components of AD for the following economy: (1) consumption = $600 billion; (2) investment = $60 billion; (3) government purchases = $120 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $705 billion, then what combination of actions would be most consistent with the goal of achieving price level stability? Increase government spending and decrease taxes O Decrease government spending and increase taxes Increase government spending and taxes O Decrease government spending and taxes
- Consider the following Keynesian economy Desired consumption: c" -220 + 0.6(Y - T)-200r Desired investment: 300 - 300r Taxes: T=20 + 0.2Y Government purchases: G= 152 Net exports: NX 150 -0.08Y -500r Money demand: L0.5Y -200r Money supply: M=936 Full-employment output: Y 1000 In this economy, the real interest rate does not deviate from the foreign interest rate. a. In the general equilibrium (that is, the long run), the value of output is 1000 , the real interest rate is 0.210, consumption is 646, investment is 237, net exports are -35, and the price level is 2.044 (Enter values rountled to three decimal places for the real interest rate and price level, and enter values rounded to integers for all other values.) b. Starting from full employment, govermment purchases are increased by 58, to 210. As a result of this change, in the short run, output becomes 1019. the real interest rate becomes 0.257, the consumption becomes 640, investment becomes 223, and net exports become - 60 (Enter…The enormous budget deficits of 2009 through 2011 meant that the federal government was borrowing upwards of $1.5 trillion per year. If that borrowing had limited the ability of the private sector to get financial capital for its purposes, economists would call this crowding out. There was O significant evidence this was a problem because interest rates were very high. O little evidence this was a problem because interest rates were very low. O significant evidence this was a problem because interest rates were very low. O little evidence this was a problem because interest rates were very high.In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the federal funds rate to about 0 percent, but still wanted to stimulate the economy more. The inflation rate in 2009 was about –1%, but households’ and businesses’ inflation expectations for the upcoming year were higher and positive, about 1.5%. a)First, do households’ and businesses’ investment demand depend on the ex ante or ex post real interest rate? Briefly explain why. b)Draw an IS-MP diagram that’s consistent with the state of the U.S. economy in 2009. Make sure that your IS and MP curves intersect in a place that is consistent with the setup of the problem, above. In particular, do your IS and MP curves intersect on the flat part of the MP curve, or the upward-sloping part? And do your IS and MP curves intersect at a positive real interest rate or a negative real interest rate? c)Suppose that the U.S. Congress and President pass a fiscal stimulus package that increases government spending.…
- The consumption function of the economy of Macro-land is given by ? = 200 + 0.75(? − ?)The investment function is given by ? = 200 − 25? . Government purchases and taxes are both 100. (a) Find the equation of the IS curve (b) The money demand function in Macro-land is given byMd= ? − 100? The nominal money supply M is 1,000 and the price level is 2. Find the equation of theLM curve (c) Find the interest rate and income for which the goods and services and money marketsare simultaneously in equilibrium. (d) Suppose the government purchases are raised from 100 to 150. What are the newequilibrium interest rate and income? (e) Suppose that the money supply is raised from 1,000 to 1,200. What are the newequilibrium interest rate and national income? (f) How will fiscal expansion in the country (Macro-land) affect national income,employment, interest rate, price level and real money balance under the Keynesianaggregate supply condition? NB: Kindly answer all questionsIn 2006, the Federal Reserve System decides to lower the money supply and raise interest rates in order to combat inflation, which caused investment spending for housing to fall. As a result, a change in investment spending for housing shifts the AS curve to the right, causing equilibrium price level to fall and equilibrium Real GDP to increase. O AS curve to the left, causing equilibrium price level to rise and equilibrium Real GDP to decrease. AD curve to the left, causing equilibrium price level to fall and equilibrium Real GDP to fall. AD curve to the right, causing equilibrium price level to rise and equilibrium Real GDP to increase.The following equations describe a certain economy C=200+0.75Yd consumption function I = 100-50r Investment function T = 60+0.2Y Tax function G = 200 Government expenditure X = 100 Exports M = 100 + 0.02Y Import function MS = 2000 Money supply MD = 0.3Y-10r Money demand Required: Derive the IS and LM equations. Caleulate the equilibrium Y, C, T, M and I. General equilibrium occurs when IS and LM curves intersect. Explain the conditions to be satisfied at this intersection, and explain the causes of d'sequilibrium.