Consider the aggregate supply-aggregate demand (AD-AS) model that we saw in class. Assume that prices are fixed in the short run and are fully flexible in the long run. The initial full-employment level of output is y-=900 and the initial price level is p=100: The aggregate demand curve is given by y=1500 – 6P: Scenario 1, short run: A reduction in personal income taxes shifts the demand curve to y= 1530 –6P. In the short run, the output is and the price level is Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol %".

Consider the aggregate supply-aggregate demand (AD-AS) model that we saw in class. Assume that prices are fixed in the short run and are fully flexible in the long run. The initial full-employment level of output is y-=900 and the initial price level is p=100: The aggregate demand curve is given by y=1500 – 6P: Scenario 1, short run: A reduction in personal income taxes shifts the demand curve to y= 1530 –6P. In the short run, the output is and the price level is Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol %".

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Part B. Numerical exercise (32 points). The aggregate demand of one IS-LM-PC economy is characterized by the following set of equations: C₁ = 50+0.6(Yt − T) ; It = 30+0.2Y₁ − 140(rt+x); T = G = 100; it = 0.05; x = 0. On the supply-side, the production function is Y₁ = Nt, the labor force is L= 600, and the Phillips curve is πtπ=0.001 (Yt - Yn) In the current period (year t), the economy is in a medium-run equilibrium with π = π = 0.02 (2%). i) Write down the IS curve and the LM line, and find the equilibrium values for the endogenous variables Yt, rt, Ct, It, ut, and πt. ii) There is a financial crisis in year t +1 and the risk premium rises to 3.25%, x' = 0.0325, while expected inflation is still +1 ==0.02. Such financial turmoil creates a demand contraction in the IS-LM-PC model, and there is no initial reaction by either the government or the central bank (G, T and i remain unchanged). Derive the new IS curve and obtain the equilibrium values for Yt+1, rt+1, C++1, It+1, ut+1, and…
The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 95. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 85, 90, 95, 100, and 105. PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 + 10 20 ¶¶ 30 40 50 60 70 OUTPUT (Billions of dollars) + 80 90 100 -O AS LRAS (?) The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level falls…
All of the following will increase Aggregate Demand (AD), except: Foreign income increases Families paying off debt Higher household income The Keynesian model of economics was developed in a response the events of the great depression. For the first time, this model showed that prices and wages were _______ and that ______may decline instead of prices. Flexible; interest rates Flexible; production Sticky; production
Consider the following AD/AS diagram of the macroeconomy, with LRAS shown as the vertical curve, AD as the downward sloping curve, and SRAS as the upward sloping curve. First, place a point at the current equilibrium. Then, suppose the government wants to stimulate the economy to restore it to long-run equilibrium by cutting taxes. Draw a new curve that shows the impact of this policy change. (You'll have to determine which, but draw it so that it reflects a parallel, vertical shift in one of the existing curves. Make sure that it's the same size as the ones shown here using the segment tool.) Finally, place a point at the new equilibrium using the point tool.
Consider the following income/expenditure diagram in the simple Keynesian model. If taxes, T, were increased, then Group of answer choices A) The Y = C+S+T line would shift to the right, and equilibrium Y would increase. B) the C+I+G line would shift downward, and equilibrium Y would decrease. C) The Y = C+S+T line would shift to the left, and equilibrium Y would decrease. D) neither of the lines would shift, and equilibrium Y would stay the same. E) the C+I+G line would shift upward, and equilibrium Y would increase.
Use the following graphs to answer the next question. In the diagrams above, AD1 and AS1 represent the initial state of an economy. If full-employment output is at Q2, which diagram represents the adjustment back to full employment output in the absence of government intervention? Multiple Choice panel (A) only panel (B) only panel (C) only panels (B) and (C)
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Which of the following is implied by a rightward shift in the economy's AS curve? There is a demand shock. The same output will be produced, but only at a higher price level. At any given price level, a higher level of output will be supplied. At any given price level, a lower level of output will be supplied.
The Simple Keynesian Model (i.e., the income-expenditure model). Assume: C = 150 + 0.9 DI I = 50 DI = C + I in equilibrium for a 2-sector model (Note: DI = C in a 1-sector model) Define the term, consumption. What is the value of “autonomous” consumption (also called “a” or the vertical intercept)? What is the value of the slope (also referred to as “b”) of the consumption function? There’s another name for the slope of the consumption function. What is it? What is the value of DI when the model is in equilibrium? What is the value of the “oversimplified” expenditure multiplier? If full-employment means that DI = $5000, then how much should autonomous consumption (or autonomous investment) increase to achieve full-employment? (Hint: Use the multiplier process formula.) Draw a graph of this 2-sector model. Indicate equilibrium DI, full-employment DI, as well as…
The figure below is a part of the AD-AS model as a description of the current situation of an economy. PA=$10 P YA=4000 Y a) Find the short-run equilibrium (i.e. the real output and the price level thereof) of this economy. b) If the natural level of output is 3500, which one will be higher, the unemployment rate at point A, or the natural unemployment rate? Explain. c) Give two reasons as to why the short-run aggregate supply is upward sloping. d) Suppose the government takes no action about the situation indicated above. Explain, with the help of a figure properly labeled, what will happen in this economy in the long run. e) Describe the two kinds of macroeconomic policies that can be used in the situation described before part c). Indicate clearly in your description whether each policy is to the aggregate demand or aggregate supply or Further, give reason(s) as to why the government may want to use these policies rather than doing nothing.
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