Suppose the following equations reflect a particular economy. C = 15 + 0.9(Y – T) I = 5 - 3r G = 5,T = 6 r = 2+ 1.5n + 0.05Y n = 2 Find the equation for the IS curve such that Y f(r) Find the equation for the MP curve such that Y = f(r) Find the equilibrium short-run level of real GDP and real interest rates.
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- Similar to how the quantity demanded for a good depends on its price, the quantity of money demanded depends on the cost of holding money, or the nominal interest rate (i). In addition to this, the demand for real money balances is also a function of income (Y). Using all of this information, suppose the demand for real money balances takes on the following functional form: (M/P)dd=500 + 2Y – 9i The Fisher equation relates the nominal interest rate to the real interest rate (r) and the expected rate of inflation (Eπ) when examining ex-ante (based on forecasts or 'before the event') effects. The equation ( (M/P)dd = 500 + 2Y – 9(Eπ – r)/(M/P)dd = 500 + 2Y – 9(r – Eπ) / (M/P)dd = 500 + 2Y + 9(r + Eπ) / (M/P)dd = 500 + 2Y – 9(r + Eπ) ) is equivalent to the function given for the demand for real money balances. Suppose the central bank announces that it will increase the money supply in the future, but it does not change the money supply today. Complete the following…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).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 agregate supply and agregate demand. 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).
- 5) Which of the following is TRUE about the long-run aggregate supply curve? A) It is vertical at the level of potential GDP. B) It shows the relationship between the price level and real GDP when the economy is at full employment. C) It does not shift in response to temporary changes in aggregate demand. D) All of the above are true. 6) Suppose the consumption function is given by the equation C= 100 +0.8YD, where YD is disposable income. What is the marginal propensity to save? A) 0.8 C) 100 B) 0.2 D) 2.0 7) Which of the following shifts the aggregate demand curve rightward? A) a tax cut B) a decrease in the quantity of money and an increase in interest rates C) a decrease in government expenditure D) expectations that future incomes will fallSuppose that the production function for the economy is given by: Y = AL/3K/3 Suppose that this economy has 1,000 units of Labour, and 125 units of capital, and TFP (A) is equal to 10. The Short-Run Aggregate Supply Curve (AS) here is given by: Y = 5p And when we consider the AEF at a price level of $1,400, the main components of it (C, I, & G) are given by (we are assuming a closed economy NX = 0): C = 300 + 0.8Y I = 300 G = 200 1. What is potential GDP in this question (Y*)? Show your work. Suppose also that for any $10 decrease in price, desired consumption will increase by $5. 2. Write down the equation for the Aggregate Demand Curve (AD) in the form of Y = a + bp. Show your work. 3. What is the current Short-Run Equilibrium value for Real GDP (Y) and the price level (p)? Show your work. 4. Draw the AD, AS, and LRAS curves. Label all x-intercepts and y-intercepts. Are we currently in an Inflationary Gap, Recessionary Gap, or in Long-Run Equilibrium? How do you know?Assume an economy operates in the keynisian ( horizontal) ranges of its aggregate supply curve curve. For each of the following changes in condition, state the direction of the effect on : 1. Aggregate demand, 2 aggregate supply 3. Price level and 4. Real gdp A decrease in government expenditure in infrastructure A severe recession occurs in a country, which has been a major importer of the nations exports. The federal government reduces business taxes. The central bank increases the cash interest rate
- Question Two Suppose the economy of Ghana in 2020 was characterized by C = ¢400m + 0.75(Y-T); I = ¢400m - 20r; G = ¢200m; T = ¢200m; M = ¢250m/P; Mª = 0.25Y - 10r a. Derive the IS and LM curve equations. Give a brief explanation as to why they are positively or negatively sloped. b. Calculate equilibrium output and interest rates (in this case assume P=1). Econ313 2020/2021 PROBLEM SET 2 Page 1 of 2 c. Suppose the government of Ghana in the second half of 2020 spent an additional ¢50m to mitigate the impact of the COVID pandemic on households and businesses and government tax revenue declined by 10% as a result of the lockdown in Ghana what will be the new equilibrium output? d. Will the policy in (c) above have an impact on interest rate? Briefly explain. e. What is the amount of the fiscal deficit incurred as a result of the government fiscal policies as pursued in (c) above?Problem 2. Consider the following economy. The aggregate demandcurve is given as: Y=300–2P. The aggregate supply curve is derived from the sticky-price model. The fraction of the firms with sticky prices is s while the fraction of the firms with flexible prices is (1-s). Assume s=0.5. The firms with flexible prices set their prices following: p/=P+(Y-Y ) The firms with sticky prices set their prices following: p==EP.Suppose you are given the following information about an economy: Short run Aggregate Supply: SRAS = Y = 5000r+ 14,400 Long run Aggregate Supply: Aggregate Demand: Investment Spending: Consumption Spending: Government Spending: Net Exports (eX – iM): LRAS = Y* = 25,000 AD = Y=C+I+G+NX_ I = 4000 – 250r C = 1000 +0.75(Y – T) G = 2000 NX = 500 Taxes – Transfers: T = 2400 Monetary Policy: Money Demand: Money Market equilibrium: Fisher equation: where i is the nominal interest rate (i.e. when the interest rate is 7%, it means i= 7) r = 2 n м 3 20,000- 2000i M$ = MD i = r+T e. Find the short run equilibrium level of real GDP (Y), and inflation rate (t), in the short run. What is the output gap in the economy? Is it an expansionary or recessionary gap?
- Assume that the long-run aggregate supply curve is vertical at Y = 3.000 while the short-run aggregate supply curve is horizontal at P=1.0, . The aggregate demand curve is Y = 2(M / P) and M = 1,500. Suppose the aggregate demand function shifts to Y = (1.5)(M / P) . What are the short- run values of P and Y? Show the change in short and long- run equilibrium graphically . Describe the short- run and long- run effects of the change in demand .economics Consider a goods market equilibrium (The aggregate expenditure model) in a closed economy a) Equationally and graphically (using the graph above) show (define) a goods market equilibrium b) Explain which factor changes the slope of the ZZ(or D, demand) curve and which factors shift the ZZ curve c) Suppose that marginal propensity to consume is equal to 0.8. Explain how much an increase in government spending 500 million of dollars raises real output and why output increases more than government spending?The U.S. economy is initially in short-run macro-equilibrium. Assume oil prices fall. As a result, we observe the following in our economy Question 2 options: a) Both the price level and real GDP decrease b) The price level falls and real GDP increases c) The price level increases and real GDP falls d) Both the price level and real GDP increase.