Consider a closed economy with aggregate price level P = 1. Suppose that the consumption function...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider a closed economy with aggregate price level P = 1. Suppose that the consumption function takes the form C = 300+ 0.5(Yd), where C is consumption, Y is Income and T denotes lump-sum taxes. Meanwhile, the investment function takes the form I = 500-20r, where I is investment and r is the real interest rate. Government spending is denoted by G and money market equilibrium is defined by the equation M = 350 +0.5Y - 30r. where M is the nominal money supply, note that M is also the real money supply since P = 1. (25 marks) a. Depict the equilibrium of the economy graphically. Suppose that the government is initially running a balanced budget, with government spending and taxes given by G = T = 200. Assume that the central bank adjusts the money supply M to ensure that the interest rate r = 2. Find the equilibrium value of Y and the equilibrium money supply M. b. Now suppose the government reduces taxes to T = 100, the excess expenditure is financed by issuing bonds. Find the new equilibrium level of output if the central bank continues to hold interest rate at 2. Find the value of tax multiplier c. Consider again the decrease in taxes from 200 to 100 with no change in G, but now suppose that the central bank keeps money supply fixed at the level calculated in part a. Find the equilibrium value of output and r. (using ISLM equilibrium) Consider a closed economy with aggregate price level P = 1. Suppose that the consumption function takes the form C = 300+ 0.5(Yd), where C is consumption, Y is Income and T denotes lump-sum taxes. Meanwhile, the investment function takes the form I = 500-20r, where I is investment and r is the real interest rate. Government spending is denoted by G and money market equilibrium is defined by the equation M = 350 +0.5Y - 30r. where M is the nominal money supply, note that M is also the real money supply since P = 1. (25 marks) a. Depict the equilibrium of the economy graphically. Suppose that the government is initially running a balanced budget, with government spending and taxes given by G = T = 200. Assume that the central bank adjusts the money supply M to ensure that the interest rate r = 2. Find the equilibrium value of Y and the equilibrium money supply M. b. Now suppose the government reduces taxes to T = 100, the excess expenditure is financed by issuing bonds. Find the new equilibrium level of output if the central bank continues to hold interest rate at 2. Find the value of tax multiplier c. Consider again the decrease in taxes from 200 to 100 with no change in G, but now suppose that the central bank keeps money supply fixed at the level calculated in part a. Find the equilibrium value of output and r. (using ISLM equilibrium)
Expert Answer:
Answer rating: 100% (QA)
Calculation C 30005 Yd I 500 20 r GT200 M 350 05 30r and interest rate set by central bank is r 2 wh... View the full answer
Related Book For
Macroeconomics
ISBN: 978-1464168505
5th Canadian Edition
Authors: N. Gregory Mankiw, William M. Scarth
Posted Date:
Students also viewed these banking questions
-
Consider a closed economy with a single telephone company, Calls-R-Us. The residents of the country make two million phone calls per year and pay $3 per phone call. One day, a new phone company,...
-
Consider an economy in which the consumption function takes the following simple algebraic form: C = 300 + 0.75DI and in which investment (I) is always $900 and net exports are always -$100....
-
Consider a closed economy in the long run. C = 150 + 0.6 (Y-T) I = 300 - 10r G = 500 T = 250 And a natural rate of output of 1,750. Show savings and investment on a well labelled diagram with the...
-
The table lists the actual annual cost y to drive a midsize car 15,000 miles per year for selected years X. (a) Predict whether the correlation coefficient is positive, negative, or zero. (b) Find a...
-
The convolution x(t) of two continuous-time signals x1(t) and x2(t), from which at least one is non periodic, is defined by (c) Determine the spectrum of x(t) using the results if part(a). (a) Show...
-
Bohlander Botanicals develops hybrid tea roses. A relative newcomer to the field, Bohlander is looking for innovative ways to advertise its products to potential customers. Rose Mayfield, sales...
-
A company has capital of 1 million ordinary shares of 1 each. It pays a dividend of 6% of its profits after tax of 480,000 on sales of 4 million. The market price of the shares is 2.40. What is the:...
-
What is the difference between preparing the statement of cash flows using the direct method and using the indirect method?
-
11) A firefighter places a 4 meters long ladder 3 meters up on a building right below a window. What is the angle of elevation of the ladder (rounded to the nearest degree)? [A] 37 [B] 41 [C] 49 [D]...
-
Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small initial investment to start the company was made by Nick and his friends. Over the years, this same group...
-
Company manufactures and sells 15,000 units per month of product A and 30,000 units per month of product B. . The selling price of product A is $40 per unit and its variable cost is $28 per unit. ....
-
The following data were provided by Mystery Incorporated for the year ended December 31: Cost of Goods Sold Income Tax Expense Merchandise Sales (gross revenue) for Cash Merchandise Sales (gross...
-
How much should Eric have in a savings account that is earning 3.50% compounded monthly, if she plans to withdraw $1,250 from this account at the end of every month for 8 years? Round to the nearest...
-
please use from the options in the pictures. no other names. Danner Company expects to have a cash balance of \( \$ 48,150 \) on January 1, 2020, Relevant monthly budget data for the first 2 months...
-
1.Sony Corporation is a Japanese multinational conglomerate corporation headquartered in Tokyo, Japan. As a major technology company, it operates as one of the world\'s largest manufacturers of...
-
what extent has globalization transformed cultural identities and led to the hybridization of cultures? What are the sociopolitical implications of these transformations ?
-
Required information [The following information applies to the questions displayed below.] A manufacturer reports the following. Sales Variable cost of goods sold Fixed overhead Variable selling and...
-
Suppose that the laptop of Prob. 2.16 is placed in an insulating briefcase with a fully charged battery, but it does not go into sleep mode, and the battery discharges as if the laptop were in use....
-
Describe the functions of money.
-
Use the Internet to identify a country with high inflation over the past year and another country that has had low inflation. For the two countries, nd the rate of money growth and the current level...
-
Consider an economy described by the following equations: Y = C + I + G + NX, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y T), I = 1,000 50 r, NX = 500 500 e, r = r * = 5. a. In this economy,...
-
SnoBoard Companys year-end balance in its Allowance for Doubtful Accounts is a credit of $440. By aging accounts receivable, it estimates that $6,142 is uncollectible. Prepare SnoBoards year-end...
-
Calculate the amount recorded as the cost of a new machine given the following payments related to its purchase: gross purchase price, $700,000; sales tax, $49,000; purchase discount taken, $21,000;...
-
Wecker Companys year-end unadjusted trial balance shows accounts receivable of $89,000, allowance for doubtful accounts of $500 (credit), and sales of $270,000. Uncollectibles are estimated to be...
Study smarter with the SolutionInn App