4) a Suppose there is a decrease in consumer optimism about the future (often called a decrease in consumer confidence). Specifically assume that consumer confidence (co) falls. What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS-LM diagram. What is the effect on output and the interest rate? b Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the decrease in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the decrease in confidence and the Federal Reserve policy? How is consumption affected?

4) a Suppose there is a decrease in consumer optimism about the future (often called a decrease in consumer confidence). Specifically assume that consumer confidence (co) falls. What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS-LM diagram. What is the effect on output and the interest rate? b Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the decrease in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the decrease in confidence and the Federal Reserve policy? How is consumption affected?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 8PA

See similar textbooks

Similar questions

If the economy is operating In the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?
1) The IS-LM Model a) In the IS/LM model explain what happens to equilibrium output and interest rate if governmentsimultaneously pursues expansionary fiscal policy and the central bank opts for a contractionarymonetary policy. Show with the help of a graph along with a very brief verbal explanation. b) Label the statements below as true or false and give a brief explanation for false statementsonly. i) For a given level of P (price), if M (nominal money) increases by 10%, M/P also increases by10% ii) A monetary expansion leads to a lower output and a higher interest rate. iii) Equilibrium in the financial market implies that an increase in income leads to a decrease ininterest rate making the LM curve downward sloping. c) Assume a model economy with the following parameters:C= 100 + 0.25 YD ; I= 100 + 0.5Y - 3000iG= 125 ; T= 100 ;(M/P)d = 6Y - 24000i ; (M/P)s = 4500Derive the IS and LM relation. 2) The short and medium run a) Suppose that the mark-up of goods prices over marginal…
Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. Based on this information, answer the following questions: b) What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy. (***explanation of crowding out where the concept is clearly defined and implications for the macroeconomy are fully discussed) c) If the MPC rises to 0.8 and also the sensitivity of real money demand to changes in the income rises well, use the IS-LM model to illustrate the impact of expansionary fiscal policy. Label the initial point prior to the fiscal policy as A and the new point following the expansionary policy as B. (***Correct fully labeled IS-LM Model shown including adjustment from the diagram in a) and correct position of points A and B.)
13. Assuming that an economy’s aggregate demand is given by its domestic consumption C and investment I, AD = C + I = c0 + c1Y + I. In the economy’s goods market equilibrium, this equals its output: AD = Y. Solving for Y this yields: Y = [1/(1 -c1 )] (c0+ I) Given this equation, which of the following statements is correct? 1. The multiplier is given by 1 – c1. 2. The boost in the economy’s output is the same, regardless of whether the aggregate demand shock comes from an increase in investment I or in autonomous consumption c0. 3. The larger the marginal propensity to consume (c1), the smaller the multiplier. 4. If c1 = 1/3, then a £1 million increase in investment would result in a £2 million increase in output. 14. In the US and the UK, loans are…
10 If Ricardian equivalence holds, and the marginal propensity to consume (MPC) is 0.75, What is the effect of a $100 reduction in taxes on aggregate demand (AD) ?
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?
Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy.
2) The following describes a certain economy C = 400 + 0.75Id consumption function I = 200 – 100r investment function T = 70 + 0.2Y Tax Function G = 100 Government Expenditure X = 10 Exports M = 150 + 0.06Y Import Function Ms = 4000 Money Supply M^D = 0.2Y – 10r Money Demand Required a) Derive the IS and LM equation b) Calculate the equilibrium Y, C, T, M, and I
Based on the below information, help Renwick economy find the equilibrium level of output. Aggregate Demand Aggregate Supply Equilibrium YAD = C + I + G YAS = A Kα L1-α YR =0.5YAD+ 0.5YAS C = 600 + βYD A = (1 + g) Ao YD = YR + TR - tYR K = 35 TR = 55 L = 80 G = 120 g = 6% I = 50 Ao = 150 t = 0.15 α = 0.65 Where C is private consumption, YD is disposable income; TR, G and I are transfer payments, government spending and total investment, respectively. A in the index of technology and K and L are capital and labour inputs. A0 is the initial levels of A and L, both assumed to be 150, while g is the growth rates. The MPC is 0.60. a.) Find aggregate demand…