Question

5) The economy has an aggregate production function
fN=15N-*1**2**N**2* , where N is labor
input. Labor supply is given by
*N**s**W**P*=-5+3*W**P* ,
where W is the money wage and P is the price level. Desired
consumption depends on real income, Y, and can be written as
*C**d**Y**=10+0.7Y* . Given real
interest rate, r, the desired investment is
*I**d**r**=30-200r* . The real money
demand is characterized by LY,r=10+Y-200r . Government spending, G,
and nominal money stock, M, is given as G=0 and M=200 .

(a) For any given level of output, find an equation that gives the real interest rate that clears the goods market.

(b) For any given level of output, find an equation that gives the real interest rate that clears the asset market.

(c) Find an equation for the aggregate demand curve.

(d) What are the equilibrium values of output, consumption, investment, the real interest rate, and the price level?

(e) Suppose that money supply doubles to 400. Discuss how the equilibrium values of output, consumption, investment, the real interest rate, and the price level will change. Is money neutral in this model?

(f) Describe the changes in equilibrium values in part (e) using the IS-LM-FE diagram.

(g) Describe the changes in equilibrium values in part (e) using the AS-AS diagram.

Answer #1

Part (A)

Part (B)

Part (C)

The aggregate demand curve shows the inverse relation between the aggregate price level and the level of national income. Aggregate demand curve is a locus of points showing alternative combinations of P and Y that are consistent with the general equilibrium of the goods market and money market,

PArt (D)

aggregate supply is locus of points where labor market is in equilibrium that is labor demand equals labor supply

The production function in an economy
is Y = 2(7N-0.02N2) With this production function, the
marginal product of labor is .mpn = 14 - .08N.
Labor Supply is , N8 =
88+2w,
Desired consumption is ,
Cd=100+0.8Y -5020r -.5G,
Desired investment is
Id=100-500r
Real money demand is Md/P =
Y-2000 (r+?e)
Other variables are expected inflation
?e=.05 , government purchases G = 200,
and money supply is M = 2100
1. Find the general equilibrium values of the real wage,...

Consider the following economy: Planned consumption: ? = 900 +
0.5(? − ?) − 180? Planned investment: ? = 950 − 180? Real money
demand: ( ? ? ) ? = 0.5? − 180?
a. (2 pts) Suppose ? = 400, ? = 450, and ? = 9,750. Find an
equation for the IS curve.
b. (2 pts) Find an equation for the LM curve.
c. (2 pts) Find an equation for the aggregate demand curve.
Express the AD curve...

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...

Consumption function: C= 12 + 0.6(YD)
Government spending: G= 20,
Investment function: I= 25-50r,
Tax collections:T=20,
Domestic price level: P = 2,
Nominal money supply: MS= 360,
Real Money Demand: L(r,Y)=2Y-200r,
Production function: Y=N,
Labor supply: N=100
(a) Find an expression for the IS curve.
Y = C + I + G + NX
since there is no foreign sector in the above question, NX = 0.
The equation becomes:
Y = C + I G
Y = 12 +...

1. An economy has full-employment output of 5000. Government
purchases are 1000. Desired consumption and desired investment are
given by
Cd= 3600 - 2000r + 0.10Y
Id = 1200 - 4000r
where Y is output and r is the expected real interest rate.
(a) Find the real interest rate that clears the goods market.
Assume that output equals full-employment output.
(b) Calculate the amount of saving, investment, and consumption
in equilibrium.

The interest rate effect on aggregate demand indicates that
a(n):
A. Decrease in the price level will
increase the demand for money, increase interest rates, and
decrease consumption and investment spending
B. Decrease in the price level will
decrease the demand for money, decrease interest rates, and
increase consumption and investment spending
C. Increase in the price level will
increase the demand for money, reduce interest rates, and decrease
consumption and investment spending
D. Increase in the supply of money...

An economy is initially described by the following
equations:
C = 500 + 0.75(Y - T); I = 1000 - 50r; M/P = Y - 200r;
G = 1000; T = 1000; M = 6000; P = 2;
where Y is income, C is consumption, I is investment, G is
government spending, T is taxes, r is the
real interest rate, M is the money supply, and P is the price
level.
a. Derive the IS equation and the LM...

3. Suppose that the expected future marginal product of capital
is MPKf = 20 – 0.02K, where K is the future
capital stock. The depreciation rate of capital, d, is 20%
per period. The current capital stock is 900 units of capital. The
price of a unit of capital is 1 unit of output. Firms pay taxes
equal to 50% of their output. The consumption function in the
economy is C= 100 + 0.5Y-200r, where C is consumption, Y is...

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...

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...

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