Suppose we have the following short-run model. Resource constrain isY = C₁+I+G₁ + EX-IMWhere Y, is economy output, C, is consumption. It is investment. G, is government purchase. EX,is exports. IM, is imports. Government purchase depends on the current state of the economy. Forexample, when there is an economic recession, the government will spend more money to supportthe economy. To incorporate this intuition, we will use the following equations. Also, we willincorporate the consumption multiplier effects.CtY₂G₁=āc + FcY₁= ág+gYtY₁EX₁ = aczY₁IM₁ = amYt1₁Y₁= a₁-b(R₂-F)a. Derive IS curve, and draw IS curve. (x-axis: Y, y-axis: R(real interest rate)) What are theslope and the y-intercept?b. Suppose the multiplier effects for the government purchase changed(xr, increase). What is theimpact of this change?e. Assume, MP(monetary policy) curve is a horizontal line. Suppose, there is a negative demandshock on consumption. (a, decrease) What is the impact of this shock? What is the responseof the federal reserve? Use the IS-MP curve graph to explain the impact of this shock.d. Continue with the previous question. Explain how the change in inflation (AT) changes whenthere is a negative shock on consumption. (Use Philips Curve)

IS curve represents the relationship between the real interest rate and the level of output that…

Suppose we have the following short-run model. Resource constrain is Y₁ = C₁ + I + G₁ + EX₁ - IM₂ Where Y, is economy output, C, is consumption. It is investment. G, is government purchase. EX, is exports. IM, is imports. Government purchase depends on the current state of the economy. For example, when there is an economic recession, the government will spend more money to support the economy. To incorporate this intuition, we will use the following equations. Also, we will incorporate the consumption multiplier effects. Ct = c + ch Y₁ G₁ Y₁ EX₁ = acrY₁ IM₂ = aim Yt =ág + F₂Yt

Suppose we have the following short-run model. Resource constrain is Y₁ = C₁ + I + G₁ + EX₁ - IM₂ Where Y, is economy output, C, is consumption. It is investment. G, is government purchase. EX, is exports. IM, is imports. Government purchase depends on the current state of the economy. For example, when there is an economic recession, the government will spend more money to support the economy. To incorporate this intuition, we will use the following equations. Also, we will incorporate the consumption multiplier effects. Ct = c + ch Y₁ G₁ Y₁ EX₁ = acrY₁ IM₂ = aim Yt =ág + F₂Yt

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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