2.2 Consider the following functions for a model economy: Consumption: C-C, +c (Y-T) Investment: 1-1, +a Y -br Labour Supply: BN - W/P Money Demand: L-L, + kY - hi Production Function: Y AK N Tax Revenue: T-T, +tY All variables with a subscript 0 denotes the autonomous component, e.g. C, is autonomous consumption. All lower-case letters (except the real interest rate r and the nominal interest rate I) are parameters. Government expenditure (G), the money supply (M), the level of technology (A) and capital stock (K) are all exogenously given. N is the level of labour employed. For this economy, the general price level (P) and the nominal wage rate (W) are fully flexible. The expected inflation is assumed to be zero.
2.2 Consider the following functions for a model economy: Consumption: C-C, +c (Y-T) Investment: 1-1, +a Y -br Labour Supply: BN - W/P Money Demand: L-L, + kY - hi Production Function: Y AK N Tax Revenue: T-T, +tY All variables with a subscript 0 denotes the autonomous component, e.g. C, is autonomous consumption. All lower-case letters (except the real interest rate r and the nominal interest rate I) are parameters. Government expenditure (G), the money supply (M), the level of technology (A) and capital stock (K) are all exogenously given. N is the level of labour employed. For this economy, the general price level (P) and the nominal wage rate (W) are fully flexible. The expected inflation is assumed to be zero.
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
Problem 2TY
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Transcribed Image Text:(iii) Solve for the output level (Y), the interest rate (r) and the price level (P) in equilibrium
Show and explain your steps clearly.
(iv) Show algebraically whether monetary policy is neutral or not in this economy.
Part III. Application.
Transcribed Image Text:2.2
Consider the following functions for a model economy:
Consumption:
C=C, +c (Y-T)
Investment:
I-1, +a Y -br
Labour Supply:
BN - W/P
Money Demand:
L-L, +kY - hi
Production Function: Y AK"N
Tax Revenue:
T=T, +tY
All variables with a subscript 0 denotes the autonomous component, e.g. C, is autonomous
consumption. All lower-case letters (except the real interest rate r and the nominal interest rate I)
are parameters. Government expenditure (G), the money supply (M), the level of technology (A)
and capital stock (K) are all exogenously given. N is the level of labour employed. For this
economy, the general price level (P) and the nominal wage rate (W) are fully flexible. The expected
inflation is assumed to be zero.
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