Question

8. Use the classical model of a closed economy to predict how each of the following shocks should affect a nation’s real aggregate income (Y), national saving (S), investment (I), and interest rate (r). Be sure in each case to clearly state your predicted direction of change (up, down, or no change) for all four variables and illustrate your predictions for S, I and r with a supply/demand diagram for the loanable funds market.

The supply of capital (KS) increases

The supply of labor (LS) decreases

Income taxes (T) are reduced

Autonomous investment (i0) increases

Answer #1

a) As the supply of capital increases the demand for loanable funds decreases. It shifts down.there

b)As the supply of labor decreases, there is no change in supply and demand of loanable funds

c)Income taxes reduces that means people have more money so they will save more and it will lead to increase in the supply of loanable funds. There will be a rightward shift.

d)Autonomous investment increase and so the supply of loanable funds increases. It will shift towards the right.

3. Use the classical model of a closed economy and the quantity
theory of money to predict how each of the following shocks would
affect real aggregate income (Y), the real interest rate (r), and
the price of goods and services (P) in a closed economy in the long
run, all else equal. For each shock, be sure to clearly state a
prediction for all three variables (up, down, or no change) and
illustrate your predictions with supply/demand diagrams for...

14. According to the Keynesian Cross model of income, how would
each of the following shocks affect a nation’s real aggregate
income (Y) in the short run, all else equal? For each shock, be
sure to clearly state a predicted direction of change for income,
illustrate your prediction with a Keynesian Cross Diagram, and
explain your predictions intuitively in words.a.Government
purchases decline b. Congress cuts household income taxes c.
Autonomous consumption increases d.Total factor productivity
increases

Use the AS/AD model to predict how each of the following shocks
would likely affect real aggregate income (Y), the overall level of
real interest rates (r), and the price of goods and services (P) in
the long run, all else equal. In each case, be sure to make a long
run prediction (up, down, or no change) for all three variables,
and illustrate your predictions with an IS/LM diagram and a
supply/demand diagram for the goods market.
a.Government purchases...

Assume that the world works according to the Classical model. In a
small open economy, output is produced according to a Cobb-Douglas
production function, consumption is equal to C=40+0.6(Y-T) and the investment
function is I=280-10r. You
know that the output produced is Y=900, government spending is
G=150, taxes are
T=90 and that the world
real interest rate is 4% (r*=4).
In
all the questions below, make sure to explain your answers and show
all your work.
a.
Compute: i. Private...

Given a closed economy in the long run (classical model):
Y=F(K,L)
Y=C+I+G C=c(Y-T)
I=I(r)
G and T set by Government policy.
For the following changes in the economy, show the impact of the
change on the loanable fund market. Use a fully labeled graph.
Also state the impact of the change on the following variables:
Y, C, G, S, I and r.
1) A decrease in Government Spending.
2) A decrease in Taxes.
3) An increase in Investment demand.

The country, Hoosier (a closed economy), has the following data:
GDP = 12,000, Consumption = 7,000, Taxes = 3,000, Government
purchases = 4,000. The investment is I = 4,000 – 1,000 r (where r
is the real interest rate, for example r = 5%, use r = 5.)
a. What is the supply equation?
b. What is the demand equation?
c. What is the equilibrium interest rate, r, and what are
national saving and investment, S and I?

1.Which of the following is a true statement about the
multiplier? *
The multiplier effect does not occur when autonomous
expenditures decrease
The multiplier is a value between zero and one
The smaller the MPC, the larger the multiplier
The multiplier rises as the MPC rises
2.According to the Keynesian model of the macroeconomic, the
most effective means for closing a recessionary gap is *
Decrease in marginal tax rates which shift SRAS
Increases in government spending which shift AD...

Question: 1 Classical Model: The Long Run 1.1 Open Economy Solve
for the following Y, W P , L, C, I, Nx, r,...
1 Classical Model: The Long Run 1.1 Open Economy Solve for the
following
Y, W P , L, C, I, Nx, r, i, Md ,
when 1. Labor supply increases
ansewer key
1. L s ?,? (W/P) ?
2. L ?? Y ?, ? S ?, ? r ?
3. r ?,? C, I ?
4. r...

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...

Economists in Fundlandia, a closed economy, have collected the
following information about GDP and public savings in their
country:
Y = 1000
G = 100
T = 100
They further estimate that national savings and investment are
governed by the following expressions:
S = 150 + 50*r
I = 600 - 100*r
Where r is the country's real interest rate in % terms (thus if you
find r = 5, then r is 5%).
Problem Set #2 - Part II...

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