Consider a closed economy with aggregate price level P = 1. Suppose that the consumption function...
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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)
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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:
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