The AD-AS model features many different output variables, all of which are equal in AD-AS equilibrium...

  

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The AD-AS model features many different output variables, all of which are equal in AD-AS equilibrium and some of which may appear awfully similar at first sight. Hopefully, the following table can help distinguish among them. Variable YE y! YD YD YS YR Yo YK Table 1. VARIOUS OUTPUT VARIABLES IN THE AD-AS MODEL Meaning Agg. expenditures Agg. income Agg. demand Money market eq. agg. demand classical agg. supply 21 Keynesian agg. supply Goods market eq. output Goods market eq. output Determined. Equations - Identity YE=C+I+G Circular flow YI-YE Circular flow eq. YD-YI YE IS-LM AS (NC) AS (K) AD-AS (NC) AD-AS (K) YEY, MDMS YD=70+711 +72G Mo Po AD function JAD ND NS w YD" - Y = YD=Y 1 Aggregate demand (8 points) Combining the IS relationship YD = 05-08r+Gº and the LM relationship r* = 8₁ +8₁YD - 35, we derived the following equation for CFMME" aggregate demand. (1-X) + X(W°/P) (AD) which determines YD* as a function of (Gº, Mº, P), parameterized by 0 T71 = Bad 1+0684¹ and 72== + a) (6 points) How does YD* respond to changes in (Gº, Mº, po)? Trace your answers by discussing how the exogenous change affects AD via IS (for Gº) or LM (for M° and Po). G-G YD-yDa B b) (2 points) Calculate the aggregate demand fiscal multiplier AAD by changing government expenditures from some arbitrary Gº to another arbitrary G" and dividing the resulting change in aggregate demand YD-YDo* by the corresponding change in government expenditures G"-G¹ (Hint: Use the Excel sheet or take the partial derivative of YD with respect to Gº) The AD-AS model features many different output variables, all of which are equal in AD-AS equilibrium and some of which may appear awfully similar at first sight. Hopefully, the following table can help distinguish among them. Variable YE y! YD YD YS YR Yo YK Table 1. VARIOUS OUTPUT VARIABLES IN THE AD-AS MODEL Meaning Agg. expenditures Agg. income Agg. demand Money market eq. agg. demand classical agg. supply 21 Keynesian agg. supply Goods market eq. output Goods market eq. output Determined. Equations - Identity YE=C+I+G Circular flow YI-YE Circular flow eq. YD-YI YE IS-LM AS (NC) AS (K) AD-AS (NC) AD-AS (K) YEY, MDMS YD=70+711 +72G Mo Po AD function JAD ND NS w YD" - Y = YD=Y 1 Aggregate demand (8 points) Combining the IS relationship YD = 05-08r+Gº and the LM relationship r* = 8₁ +8₁YD - 35, we derived the following equation for CFMME" aggregate demand. (1-X) + X(W°/P) (AD) which determines YD* as a function of (Gº, Mº, P), parameterized by 0 T71 = Bad 1+0684¹ and 72== + a) (6 points) How does YD* respond to changes in (Gº, Mº, po)? Trace your answers by discussing how the exogenous change affects AD via IS (for Gº) or LM (for M° and Po). G-G YD-yDa B b) (2 points) Calculate the aggregate demand fiscal multiplier AAD by changing government expenditures from some arbitrary Gº to another arbitrary G" and dividing the resulting change in aggregate demand YD-YDo* by the corresponding change in government expenditures G"-G¹ (Hint: Use the Excel sheet or take the partial derivative of YD with respect to Gº)

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a How does y respond to changes in G M P G An increase in government spending G shifts the IS curve to the right increasing aggregate demand and output y This is because an increase in G leads to an i... View the full answer