Assumptions for all the questions: Private consumption is a function of disposable income and wealth (unless stated otherwise). Investment depends only on the real interest rate (unless stated otherwise). please present your answer using graphs and short explanations. Assume that the economy is open and that CF= 0. Assume that Y*< Yfull. Analyze the influence of the following events (analyze each event separately unless said otherwise) on the equlibrium outcomes. Use the diagrams and show the changes relative to the initial situation which you described in A. In each section show what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, private consumption, investment and inflation rate in the short run and in the long run. a) Assume that we are in the initial situation of short-run equilibrium described above. The government decided to decrease taxes and increase bonds in order to increse household consumption. asume that after the tax reduction the economy is still at Y*< Yfull. Explain and show graphically the process that will occur in the economy as a result of this policy, refer to all the economic variables in B above, in the short run and in the long run. b) Show the changes relative to the initial short run equilibrium as described in A: The government discussed another option to help household consumption. It will give additional free education services and finance it with taxes. Assume that the new short run equilibrium ends at Y full. Explain what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, investment and inflation rate in the short-run and in the long-run. Has private consumption incresed at the new equilibrium? c) Assume that the economy is at the initial short run equilibrium described in A. Assume that the central bank decided to change its declared policy and to decrease the target inflation rate. Assume that after the change Y*Yfull. Explain what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, private consumption, investment and inflation rate in the short run and the in the long run. technological decrease leads to a decrease in Yfull. It can happen theoretically.
Part B solution
Assumptions for all the questions:
- Private consumption is a function of disposable income and wealth (unless stated otherwise).
- Investment depends only on the real interest rate (unless stated otherwise).
please present your answer using graphs and short explanations. Assume that the economy is open and that CF= 0. Assume that Y*< Yfull.
Analyze the influence of the following events (analyze each event separately unless said otherwise) on the equlibrium outcomes. Use the diagrams and show the changes relative to the initial situation which you described in A. In each section show what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, private consumption, investment and inflation rate in the short run and in the long run.
a) Assume that we are in the initial situation of short-run equilibrium described above. The government decided to decrease taxes and increase bonds in order to increse household consumption. asume that after the tax reduction the economy is still at Y*< Yfull. Explain and show graphically the process that will occur in the economy as a result of this policy, refer to all the economic variables in B above, in the short run and in the long run.
b) Show the changes relative to the initial short run equilibrium as described in A: The government discussed another option to help household consumption. It will give additional free education services and finance it with taxes. Assume that the new short run equilibrium ends at Y full. Explain what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, investment and inflation rate in the short-run and in the long-run. Has private consumption incresed at the new equilibrium?
c) Assume that the economy is at the initial short run equilibrium described in A. Assume that the central bank decided to change its declared policy and to decrease the target inflation rate. Assume that after the change Y*<Yfull. Explain what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, private consumption,investment and inflation rate in the short run and in the long run.
d) Assume that the economy is in initial short run equilibrium described in A and there was a sudden technological decrease in the economy. Assume that after the shock Y*>Yfull. Explain what will happen to output, real interest rate, net capital flow (CF), import surplus (IM-EX), real exchange rate, private consumption, investment and inflation rate in the short run and the in the long run. technological decrease leads to a decrease in Yfull. It can happen theoretically.
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