1. Over the past 40 years interest rates in the developed world have fallen to very low levels. One argument for this is rising income inequality which has led to imbalances in savings and insufficient aggregate demand. Take the following Keynesian consumption functions for the "poor" (P) and “rich" (R) as given c² = Č+c°y®, (1) CR = Č +cRyR. (2) Suppose that C is the same for both poor and rich. Further suppose that c > ck and define aggregate demand as the sum of C' and CR. Based on the above, could a rise in income inequality explain "insufficient demand"? Ex- plain.'
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- 1. In the Keynesian model, suppose that the economy has the following values : C = 100 + 0.75*Y G = 300 I = 200 NX = 0 (remember Y = GDP = C + I + G + NX) a) Solve for the level of equilibrium output in this economy. b) What is the MPC in this economy? What is the multiplier on government spending? (I want a specific number here, not a definition) c) Household savings is defined as income minus consumption (S = Y – C). What is the level of household savings in this economy? d) Suppose that households become nervous about the future of the economy and decide that they will consume less and save more money, so their new consumption function becomes C = 100 + 0.6*Y Solve for the new equilibrium level of output and calculate how much households end up saving. How has it changed from the level of savings in part c? e) How much does the government needs to increase its spending by to counteract the fall in economic output in this model?5 3. permanent Income Hypothesis a) suppose that beta=.9 and R= 2222 (that is ~22%). For an individual who acts according to the PIH, will their consumption next period be higher than current consumption or lower? b) What is the main crucial difference between the Keynesian Consumption function and the consumption function derived from the PIH (or Lifetime Income Hypothesis)? c) If Present Value of future income stream is 500,000 and a person has a beta of.8, how much will their consumption go up today if only today's income increases by 1000? How much will their consumption increase (approximately) if their income goes up by 1000 in all periods?1. Induced consumption is: (a) the part of consumption which is independent of the level of income.(b) the minimum level of consumption that is financed from sources otherthan income.(c) The maximum level of consumption that is financed from sources otherthan income.(d) shown by the slope of the consumption function.2. In the Keynesian model, an introduction of a proportional tax will: (a) increase the slope of the consumption function.(b) reduce the multiplier.(c) increase the equilibrium level of income.(d) increase the multiplier.3. A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.
- It is found that the consumption function for the economy is C = 50 + 0.8 Y d . Current level of output is 8800 and the potential GDP is 9000. Assuming the Keynesian view of the short run, answer the following questions. Illustrate this economy using a carefully labeled diagram. What is a larger concern for this economy: unemployment or inflation? If the economic policy makers want to bring the level of output to the potential GDP by changing the government expenditures (G), how much do they need to change G? Be sure to indicate whether the change is an increase or decrease. True or False and explain: If the policy in part c was successful, the unemployment rate will be zero.It appears that there was an economic drop during the 2019-2021 period as a result of the pandemic. Assume that we can view this as a negative shock to private investment, due to a combination of lockdowns and uncertainty about the world. In under 150 words, answer the following question: Was government consumption expenditure used as stabilisation policy following the slow-down during 2020 and 2021? (Note, you only need to discuss this in terms of our demand model of Income-Expenditure, IS-MPR, and Aggregate Demand.) Year Government consumption per capita ($) (rounded to a whole number) 2003 6672 2004 6820 2005 7016 2006 7394 2007 7515 2008 7757 2009 8040 2010 7892 2011 7931 2012 7969 2013 7955 2014 8041 2015 8154 2016 8124 2017 8096 2018 8238 2019 8371 2020 8658 2021 9207 2022 9962Elaborate on the difference between a binding and non-binding borrowing constraints and thetwo consumption functions that result.b. From the Intertemporal Choice Model, many theories (non-Keynesian theories ofConsumption) came into being. Using graphical and mathematical expressions, compareand contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesis
- 16. Consider a closed economy with demand for goods as follows: Yd = C+I+G C= 200+0.80 ( Y-T) I= 600 G=1000 T=1000 a. What is “autonomous expenditure” ( Eo) for this economy? hint: the Keynesian cross model of income determination.Suppose a closed economy has an aggregate consumption function given by C = 300 + 0.75Yd and generates $2200 output and income in equilibrium. Suppose also that the government collects a lump-sum tax of 300. How much will the private sector be saving total in equilibrium? (round your answer to the nearest whole value)Set 1: Equilibrium output1.Government. Suppose the consumption function is given by C= 100+ .8Y, while investment is given by I= 50 a) What is the equilibrium level of income in this case?b) What is the level of saving in equilibrium? c) If, for some reason, output is at the level of 800, what will the level of involuntary inventory accumulation be?d) If I rises to 100 (we discuss what determines I in later chapters), what will the effect be on the equilibrium income?e) What is the value of the multiplier, a, here?f) Draw a diagram indicating the equilibria in both (a) (d). 2.Suppose the consumption behaviour in problem 1 changes so that C= 100+ .9Y, while I remains at 50.c) Does this change in investment spending have more or less of an effect on Y than it did in problem 1? Why?d) Draw a diagram indicating the change in equilibrium income in this case.
- Set 1: Equilibrium output1.Government. Suppose the consumption function is given by C= 100+ .8Y, while investment is given by I= 50 a) What is the equilibrium level of income in this case?b) What is the level of saving in equilibrium? c) If, for some reason, output is at the level of 800, what will the level of involuntary inventory accumulation be?d) If I rises to 100 (we discuss what determines I in later chapters), what will the effect be on the equilibrium income?e) What is the value of the multiplier, a, here?f) Draw a diagram indicating the equilibria in both (a) (d). 2.Suppose the consumption behaviour in problem 1 changes so that C= 100+ .9Y, while I remains at 50.a) Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate the new equilibrium level, Y', to verify this.b) New suppose investment increases to I= 100, just as in problem 1(d). What is the new equilibrium income?c) Does this change in investment spending have more or less of an effect…Suppose the consumption function is given by C(Y)=60+0.8(Y-T) where Y represents output and T stands for net taxes. Suppose further that the level of investment, I, is 400, the level of government expenditure, G, is 300, and net taxes, T, are 200. What is the equilibrium level of output in this economy? a. 1720 b. 3000 c. 1590 d. 720Question Two a. Explain the difference between a binding and non-binding borrowing constraints and thetwo consumption functions that result.b. From the Intertemporal Choice Model, many theories (non-Keynesian theories ofConsumption) came into being. Using graphical and mathematical expressions, compareand contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesis