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…
Q.1.7 In the Keynesian macroeconomic model, the equation for the savings function is given as: S = -420 + 1/4Y. Based on this information, which of the following statements is correct? (1) The marginal propensity to consume is 1/4; (2) The marginal propensity to save is -420;
An economy is described by the following: C=20+0.9Y I=120-200r. Md=250+0.2Y-400r. Ms/P=1250 Y=70 W=17.5 Lf=144 a) Find AS and AD. b) Find the equilibrium level of Y and P c) Graphically represent this economy d) Find the long-run Y of this economy. e) What is the level of government expenses G, the government needs to impose in order to lead the economy to the full employment? (Show the long-run graphically).
The following equations describe a Keynesian model of a closed economy: C = 500 - 0.5(Y - T) - 100r I = 350 - 100r L = 0.5Y - 200i πe = 0.05 G = T = 200 Y = 1850 M = 3560 a. Find the full-employment equilibrium values of the real interest rate, consumption, investment, and the price level. b. Suppose government purchases decline to 175, with no change in taxes. What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and the price level? c. Suppose instead that government purchases rise to 225, with no change in taxes, starting from the equilibrium in part (a). What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and…
the following holds in an economy: YP = $20 Trillion, YActual = $20 Trillion, MPČ = 0.6, SRAS is perfectly elastic. a) Use an AD-AS diagram to depict the economic scenario described. b) Suppose there is a $0.2 Trillion increase in autonomous consumption spending. Further suppose there are no taxes. What would be the ultimate effect on YActual? Draw a new diagram to depict this shock and resulting short-run macroeconomic equilibrium. c) Again suppose there is a $0.2 Trillion increase in autonomous consumption spending (starting from the baseline case you depicted in part a). Further suppose there are taxes and the tax rate is 30%. What would be the ultimate effect on YActual? Draw a new %3D diagram to depict this shock and resulting short-run macroeconomic equilibrium. d) Use answers to parts b) and c) to comment on how taxes act as automatic stabilizers in an economy.
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.
Consider the impact of thriftiness in the Keynesian Cross Model. Suppose the consumption function is C=C¯+c(Y−T¯) where C¯ is called autonomous consumption and cc is the marginal propensity to consume. a) What happens to equilibrium income when society becomes more thrifty (i.e., a decline in C¯) b) Your answer to (a) is called the Paradox of Thrift. Explain why consuming less (and saving more) is not a good thing in this model. (Hint: a decrease in consumption wouldn’t be so bad in our classical model of Chapter 3 because we assumed national savings equaled investment in the long run.)
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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