Question

Assuming a demand driven economy:

a. Write down a complete, parametric system of equation that defines the macroeconomic equilibrium of this economy.

b. Derive the AE as a function of actual national income and interpret it and every parameter of it.

c. Solve for equilibrium national income.

d. Using your answer in part (c), interpret the simple multiplier.

e. Show in a graph the effect of the simple multiplier after an exogenous change in the autonomous part of the AE. Clearly and precisely explain the mechanism that generates the multiplier effect.

f. What are the assumptions in the background of this model? Clearly discuss the importance and the effects of these assumptions on the working of the mode. What happens if the assumption regarding the price level is relaxed?

g. Graphically explain the process of deriving aggregate demand curve.

h. Graphically show the effect of the simple multiplier for an exogenous change in autonomous aggregate expenditure using the AD curve and its connection with the AE curve. Does the simple multiplier give an accurate indication of the change in equilibrium national income if the assumption on the price level is relaxed? Explain why.

j. Introducing the supply side of the economy to this model, explain, and graphically illustrate, the effect of a negative aggregate supply shock on equilibrium. Explain every effect of such a change and the mechanism behind it.

k. Consider a level of potential output that is above a typical equilibrium of this economy. If you were to advise the government on proper fiscal policy, what sort of policy would you advise?

l. Assume that the policy you recommend is implemented by the government. Clearly and precisely explain every effect of this policy and the mechanisms that will result in a change in equilibrium real GDP in this economy. How would this policy affect the price level? Graphically show all the changes in the model.

m. What happens to the ultimate impact of the policy you advise in previous part if at the same time that the policy is implemented the cost of labour increases for all firms due to exogenous reasons? Can you determine whether the effects on equilibrium real GDP or equilibrium price level are certain. If not certain, what do they depend on? Clearly explain.

Answer #1

3. Consider an economy characterized by the following
equations
AE = 10 + 0.75Y - 0.5P
AS: Y = 10 + P
where Y is national income, AE is desired aggregate expenditure,
P is the price level, AS is the aggregate supply. National income
is in billions of dollars.
a) What is the equation for the aggregate demand (AD)? Solve for
equilibrium P and Y. Illustrate the equilibrium in a diagram with P
on the vertical axis and Y on...

Assume that an economy is initially operating at the natural
rate of output (Y ). A short-run
aggregate supply equation is given by Y t = Y + α ( P t − P te )
,
where Y is output, P is the price level, P e is the expected
price level, and α > 0
(a) What is the slope of the aggregate supply curve?
(b) According to the sticky-price model, the value of α depends
on the...

Calculate Aggregate demand in an economy and establish the level
of equilibrium.
Calculate the impact on an economy of an increase investment
spending, given a specific multiplier.
Explain factors that can change aggregate demand.
Calculate AE given the information below and completely fill in
the table. There is a practice exercise in Module 7. Please attempt
the practice first.
Where is equilibrium in this economy based on the table?
State the level, don’t just point to it or
highlight it....

11. Demand-pull
inflation occurs when the aggregate __________ curve shifts
_______.
A. demand, right
B. demand, left
C. supply, right
D. supply, left
12. When the
aggregate price level decreases, the resulting decrease in interest
rates will most likely ___________ investment and _____________
consumption.
A. increase, increase
B. increase, decrease
C. decrease, increase
D. decrease, decrease
13. The economy is
operating at full capacity. The long-run aggregate
supply curve is __________. In the long run, an increase
in the aggregate price level will __________ output.
A. horizontal, increase
B. horizontal, not change
C. vertical, increase
D. vertical,...

1. Holding everything else constant, the multiplier effect of a
$100 tax cut :
a)is the same as the multiplier effect of a $100 increase in
G.
b)is smaller than the multiplier effect of a $100 increase in
G.
c)is larger than the multiplier effect of a $100 increase in
G.
d)may be smaller than, larger than, or equal to the multiplier
effect of a $100 increase in G.
2. When the government borrows funds in financial markets to pay...

1. Covid-19 has slowed down the global economy. In a situation
like this, as an advisor to the treasurer of federal government of
Australia, advise the treasurer on what type of fiscal policy
should be enacted? How would this be enacted via taxes? Through
government spending What is the intended effect of this policy on
aggregate demand? Diagram
2. What effect does rising business optimism and confidence have on
the aggregate demand curve? Give examples.
3. Suppose a summer of...

An increase in aggregate demand (AD) can cause
a recession in the economy.
an increase in cyclical unemployment.
an expansion in the economy.
Flag this Question
Question 22 pts
Economic growth is shown in the AS-AD model as a
leftward shift in the short run AS curve.
rightward shift in the AD curve.
rightward shift in the long run AS curve.
Flag this Question
Question 32 pts
In the long run, the most important factor that shifts the
aggregate supply...

below is part of the question i dont get, Aggregate demand is
suppose to be negative slope but the function is positive slope,
please explain how to interpret this,
Ive searched the internet it give me reasons why it is inverse
and downward sloping, I just dont see in the math part how I can
interpret this as negative.
Also the explicit price thing is confusing.
Assume we start from full employment (i.e. output is at
potential), with investment spending...

Suppose the following aggregate expenditure model describes the
US economy:
C = 1 + (8/9)Yd T = (1/4)Y I = 2 G = 4 X = 3 IM = (1/3)Y where C
is consumption, Yd is disposable income, T is taxes, Y is national
income, I is investment, G is government spending, X is exports,
and IM is imports, all in trillions $US.
(a) Derive a numerical expression for aggregate expenditure (AE)
as a function of Y. Calculate the equilibrium...

During 2007-2009, the global economy experienced a severe
recession. To deal with recessionary gaps in their economies, many
countries implemented expansionary fiscal policies to increase
aggregate expenditures. Consider the following hypothetical
responses (the actual policies were different in each country).
In 2009, the government of the United States introduced a $675
billion stimulus package - additional government expenditures with
no changes to the tax system. In Canada, the tax rate was reduced
from 33 percent of GDP to 30 percent...

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