Question

3. The components of planned aggregate spending in a certain economy are given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r

Planned Investment: Ip = 400–3000r

Government Revenue and Spending: T = 300 and G = 450 Net Export: NX
= 75

where r is the real interest rate (For example, r = 0.01 means
that the real interest rate is 1 percent). (1) Find the level of
public saving.

(2) Suppose that the real interest rate is 5%. Show the autonomous
consumption level and the autonomous expenditure level.

(3) How does a two percentage point decrease in the real
interest rate affect the short-run equilibrium output?

(4) Suppose that the potential output of this economy equals 4800.
Find the short-run equilibrium real interest rate that brings the
economy to full employment.

(5) Suppose Government Revenue T = tY (0< t <1); r stays at
the initial level (5%), Please calculate the multiplier effect of
the government spending increase on the output change (ΔY/ΔG).

Answer #1

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

Question 1
In a certain economy, the components of planned spending are
given as:
Cd=600+0.8(Y-T)-350r, Ip=200-450r, G=250, NX=20, T=300
Find the relationship between planned aggregate expenditure and the
real interest rate, r, and output, Y, in this economy. The real
interest rate, r, is set by the Reserve Bank to equal 0.05 (5 per
cent). Find the short-run equilibrium output.
Suppose potential output (Y*) is 4100. The Reserve Bank has set the
real interest rate equal to 5 per cent....

An economy is described by the following equation:
C = 1600 + 0.6 (Y - T) - 2000 r
IP = 2500 - 1000 r
G = 2000
T = 1500
C is the consumption, IP is the planned investment, G
is the government spending, T is the net taxes, r is the real
interest rate.
This economy is a closed economy meaning that the Net Exports
are always 0, i.e. NX = 0.
a. Find an equation relating the...

Consider an economy in which taxes, planned investment,
government spending on goods and services, and net exports are
autonomous, but consumption and planned investment change as the
interest rate changes. You are given the following information
concerning autonomous consumption, the marginal propensity to
consume, planned investment, government purchases of goods and
services, and net exports:
Ca = 1,500 – 10r; c = 0.6; Ta = 1,800; Ip = 2,400 – 50r; G =
2,000; NX = -200
(a)Derive Ep and...

2) Consider the following Keynesian model of the economy.
Consumption Function: C = 12 + .6 Y d,
Investment Function: I = 25 − 50 r,
Government Spending: G = 20,
Tax Collections: T = 20,
Money Demand Function: L d = 2 Y − 200 r,
Money Supply: M = 360,
Price Level: P = 2.
a) Find an expression for the IS curve and plot it.
b) Find an expression for the LM curve and plot it.
c)...

Consider the following economy (with flexible exchange rate
system):
• Desired consumption: Cd = 300 + 0.5Y − 2000r
• Desired investment: Id = 200 − 3000r
• Government purchases: G = 100
• Net export: NX = 350 − 0.1Y − 0.5e
• Real exchange rate: e = 20 + 1000r
• Full employment: Y ̄ = 900.
• Nominal money stock: M = 4354
• Real money demand: L = 0.5Y − 200r
(a) Find the equations for...

Let: C = consumption, Ip = investment spending (as a function of
price level), G = government spending, Tx = tax revenue, Yd =
after-tax income, Assume for a given closed economy: C=100 + 0.9 Yd
– 20P Ip= 400 – 40P G=300 T=100 Moreover, aggregate supply curve
for this economy is defined by the following equation: P=1.41 +
0.0001Y
a. According to the investment equation (Ip= 400 – 40P) as
overall price level in the economy increases investment spending...

Let: C = consumption, Ip = investment spending (as a function of
price level), G = government spending, Tx = tax revenue, Yd =
after-tax income, Assume for a given closed economy: C=100 + 0.9 Yd
– 20P Ip= 400 – 40P G=300 T=100 Moreover, aggregate supply curve
for this economy is defined by the following equation: P=1.41 +
0.0001Y a. (10 points) According to the investment equation (Ip=
400 – 40P) as overall price level in the economy increases...

. Suppose an economy is represented by the following
equations.
Consumption
function
C = 200 + 0.8Yd
Planned
investment
I = 400
Government
spending
G = 600
Exports
EX = 200
Imports
IM = 0.1Yd
Autonomous
Taxes
T = 500
Marginal Tax
Rate
t=0.2
Planned aggregate
expenditure AE = C
+ I + G + (EX - IM)
By using the above information calculate the equilibrium level
of income for this economy and explain why fiscal policy becomes
less effective...

Consider a small open economy given by the
following:
Consumption Function: Ct = 17.2 + 0.7(Yd)t
Investment Function: It = 24 -100rt
Real Demand for Money: Lt = 6Yt-1400r
Net Exports Schedule: NXt = 8 – 4et
Government Spending: G0 = 36
Tax Collections: T0 = 36
World Interest Rate: r0 = 0.15
Price Level: P0 = 4
Domestic Money Supply: M0 = 2520
Assume further that the economy is currently at the
long-run equilibrium.
(10 points) Graph the situation...

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