Answered: Suppose that the following equations…

Suppose that the following equations represent an entire economy. What size output shock will send the economy into a liquidity trap? t = €y -0.5. (r? - 3%) r = 2% + (πt-2%) + 2.9t πt = 2% + t

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a closed economy in which: C=250+0.8 (Y-T)I=400−30 rT=150G=220Y=C+I+G where Y is GDP, C is consumption, I is investment, T is taxes, G is government purchases, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP would be 3,000. a. Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 3 percent, so r = 3. Solve for GDP (Y). Y=______ b. How much is the private saving (SPVT)? SPVT=______ c. How much is the government spending multiplier (k)? k=______ d. Assuming no change in monetary policy, what change in government purchases (ΔG) would restore full employment? ΔG=______ e. Assuming no change in fiscal policy, what change in the interest rate (Δr) would restore full employment? Δr=______
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You have £2,000 and you can only choose one of the following two investments. First, you may deposit the sum of £2000 at an interest rate of 7% for one year. There is 60% probability that inflation will run at 5% for the next year and a 40% probability that inflation will run at 2%. The second investment allows you to deposit a fixed sum of only £1500 at a certain inflation adjusted (real) return of 8% for one year, but you must keep the rest of your money in a cash account. Which of the two schemes would you take?
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Under what circumstances does a liquidity trap arise and why does it lead to a failure in the above mechanisms?
D7) IS-LM Model: Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a monetary expansion will have on output, the interest rate, and investment. ( Properly)
Consider the following graph. The IS curve representing the goods market is drawn as the usual downward sloping curve. The ONRRP for May 2023 was 5.05% and the IORB was 5.15%. The effective federal funds rate (EFFR) was 5.08%. Long-term trend output is given by the vertical line at Y*. 5.40 5.30 5.15 5.05 Y* Y-C(Y-TW)+1(Y)+G Y 3. If the current level of the EFFR in the band between IORB and ONRRP causes housing prices to fall, could output fall below trend output? Explain. Illustrate in the graph above.
Consider an economy characterised by: C = 500+ 0.8(Y-T) I = 400 120r +0.1Y G=300 T = 0.25Y L(r, Y) = Y - 300r M/P=600 13 where C, Y, I, G, T, r, L and M/P, denote consumption, output, investment, government spending, taxes, the interest rate, liquidity preferences and the real money supply, respectively. • Derive expressions for the IS and the LM schedules and plot the two curves. . Find the equilibrium interest rate and the equilibrium level of income. Derive the Keynesian multiplier and comment its properties compared to the standard case. . Calculate and interpret the effects on Y and r of an increase of money supply that bring M/P to 1200.
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