Consider a closed economy, where wages are sticky in the short run. The consumption function is C = co + c₁ (Y-T), where the marginal propensity to consume c₁ is equal to 0.8. Initially the economy is in equilibrium at Y = Y* and P = Pº, where Pe is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal. Suddenly the government increases government spending G by $200. For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all, enter 0 as your answer. 10. By how much will output Y change in the short run? 11. By how much will consumption C change in the short run? 12. By how much will investment I change in the short run? 13. By how much will output Y change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated? 14. By how much will consumption C change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated? 15. By how much will investment I change (compared to its initial level before the change in G) in the long run after wage contracts are renegotiated?
Consider a closed economy, where wages are sticky in the short run. The consumption function is C = co + c₁ (Y-T), where the marginal propensity to consume c₁ is equal to 0.8. Initially the economy is in equilibrium at Y = Y* and P = Pº, where Pe is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal. Suddenly the government increases government spending G by $200. For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all, enter 0 as your answer. 10. By how much will output Y change in the short run? 11. By how much will consumption C change in the short run? 12. By how much will investment I change in the short run? 13. By how much will output Y change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated? 14. By how much will consumption C change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated? 15. By how much will investment I change (compared to its initial level before the change in G) in the long run after wage contracts are renegotiated?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider a closed economy, where wages are sticky in the short run. The consumption function is
C = co+c₁(Y-T), where the marginal propensity to consume c₁ is equal to 0.8. Initially the economy is in
equilibrium at Y = Y* and P = Pº, where Pe is the price level that was expected when agents agreed their
fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal.
Suddenly the government increases government spending G by $200.
For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you
think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all,
enter 0 as your answer.
10. By how much will output Y change in the short run?
11. By how much will consumption C change in the short run?
12. By how much will investment I change in the short run?
13. By how much will output Y change (compared to its initial level before the change in G) in the long run,
after wage contracts are renegotiated?
14. By how much will consumption C change (compared to its initial level before the change in G) in the long
run, after wage contracts are renegotiated?
15. By how much will investment I change (compared to its initial level before the change in G) in the long
run, after wage contracts are renegotiated?
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