Consider a hypothetical economy characterized by the following behavioral equations. IS LM C=400-200r+0.2Y Md=Y-1000r I= 240-400r Ms=800 G=200 P=2 a) Show the impact of expansionary monetary policy which is an increase in tax by 50. b) Show the impact of expansionary fiscal policy which is an increase in nominal money supply by 100. c) Using balanced budget multiplier show the impact of an increase in government expenditure and tax by 50

Consider a hypothetical economy characterized by the following behavioral equations. IS LM C=400-200r+0.2Y Md=Y-1000r I= 240-400r Ms=800 G=200 P=2 a) Show the impact of expansionary monetary policy which is an increase in tax by 50. b) Show the impact of expansionary fiscal policy which is an increase in nominal money supply by 100. c) Using balanced budget multiplier show the impact of an increase in government expenditure and tax by 50

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter16: Macro Policy Debate: Active Or Passive?

Section: Chapter Questions

Problem 3.4P

See similar textbooks

Similar questions

This problem examines the implications of allowing investment to depend on output. Suppose the economy is characterized by the following behavioral equations: C = c, + c,YD Y, = Y-T |= bo + b,Y Government spending and taxes are constant. Note that investment increases with output. co is autonomous consumption, C, is the propensity to consume, and bo is business confidence. Solve for equilibrium output. Y = (Properly format your expression using the tools in the palette. Hover over tools to see keyboard shortcuts. E.g., a subscript can be created with the_ character.)
An economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, the new expenditure is 51.567 Now we're adding an LM curve to the economy from above. The money market is given by M/P = 0.02 / (r - Y/10,300)^2 M = 22 P = 2 1. We continue with the fiscal expansion scenario, with G0=10 and G1=12. Draw a new graph that includes the LM curve and both the IS curves. Show how at the same old unchanged r = 0.047 the volume of transactions supported by the money market is lower than the expenditure afforded by the goods and financial markets. That is, map r=0.047 into the expenditure, Y1, and into the original volume of transactions, Y0. 2. Now let's let the three markets interact and choose the…
An economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. 1. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, find the new expenditure. 2. graph the change in the IS curve. Label axes and curves, project the new and the old values on respective axes. 3. How will the IS curve be affected? a. slide down along the IS curve b. slide up along the IS curve c. shift of the IS curve right d. shift of the IS curve left
11) If the investment demand curve is almost horizontal, A) both monetary and fiscal policy are ineffective. B) both monetary and fiscal policy are very effective. C) monetary policy is ineffective, but fiscal policy can be effective. D) monetary policy is effective.
You are given data on the following variables in an economy: Item Value Government spending 300 Planned investment 200 Net exports 50 Autonomous taxes 250 Income tax rate 0.1 Marginal propensity to consume 0.5 Consumption (C) is 600 when income (Y) is equal to 1500. a. Solve for autonomous consumption and equilibrium level of output if there is an income tax t=0.2. b. In the economy with an income tax of 10%, what is the budget balance of the government? c. Briefly explain the function of the multiplier as part of Keynesian
The Covid-19 pandemic has forced many countries to partially shutdown their economies to prevent the spread of the virus. In response, many governments including Jamaica have embarked on expansionary fiscal policy. Government Fiscal and Monetary Policy can coordinate to achieve specific economic goals. (a) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Bank of Jamaica want to hold the money supply constant. Please explain your answer. (b) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume instead, the Bank of Jamaica want to hold interest rate constant. Please explain your answer. (c) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Government wants to hold output constant. Please explain your answer.
Consider an economy that is characterized by the following equations: C = 150 + 0.65(Y - T) – 200r (Consumption) (Тахation) (Investment Demand) (Government Expenditure) (Exports) (Imports) T = 100 + 0.2Y I = 200 G = 500 - 200r X = 100 IM = 150 + 0.1(Y – T) – 100r (Money Demand) (Money Supply) L = -25 + 0.5Y - 500r M = 133,200 pSR = 120 (Short-Run Price Level) Answer each of the following questions. In your answers, be sure to state any assumptions that you impose and provide an explanation. Derive the AD and SRAS curves. Solve for the short-run equilibrium in the AD-SRAS model. Is your solution the same as in part 3 above? Why or why not? Is the fiscal multiplier in this economy larger or smaller than if the asset market were not accounted for in the model? Briefly explain. True or false? The aggregate demand curve is downward-sloping because the demand for goods and services increases as the price decreases. Briefly explain.
Given the above model for an economy C = 100 + 0.8Yd G = 800 T = 500 I = 200 a) Calculate the level of savings when the economy is in equilibrium. b) Find government spending multiplier. c) Find the new equilibrium level of output if investment is increased by 100 (ΔI = 100). d) Find Tax multiplier. e) Find the new level of output if the lump-sum tax is increased by 100 (ΔT = 100). f) Find the new level of output if the government spending is increased by 100 and this government expenditure increase is financed by the same amount of increase in lump-sum taxes (ΔG = ΔT = 100).
(a) In order to get out of recession, the government chooses to reduce taxes (T) by 250. Find the new equilibrium level of income and interest rates. (b) If instead (i.e. government taxes are back to the original level of 1000), it chooses to increase the money supply (M) by 250. Find the new equilibrium level of income and interest rates.
In order to financially stimulate the nation, the Federal government injected $900 billion dollars into the economy. However, the results were less than spectacular. One reason could have been a failure to understand the marginal propensity to consume. Assume the marginal propensity to consume (MPC) was only 0.4. How much of that $900 billion went to increased consumption? Where did the rest of the money go? Increased consumption: Where did the rest go? Using MPC = 0.4, what is the spending multiplier (the actual numerical value please): What was the overall change in income as a result of the stimulus package after the multiplier completely works its way through the economy?
The following equations describe a certain economy C=200+0.75Yd consumption function I = 100-50r Investment function T = 60+0.2Y Tax function G = 200 Government expenditure X = 100 Exports M = 100 + 0.02Y Import function MS = 2000 Money supply MD = 0.3Y-10r Money demand Required: Derive the IS and LM equations. Caleulate the equilibrium Y, C, T, M and I. General equilibrium occurs when IS and LM curves intersect. Explain the conditions to be satisfied at this intersection, and explain the causes of d'sequilibrium.
Consider a closed economy with no government, where aggregate demand is determined by autonomous consumption, investment (which is independent of output), and the marginal propensity to consume. a) Given that autonomous consumption is 20, investment is also 20, and the marginal propensity to consume is 0.6, write out an equation for aggregate demand (AD) in this economy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, use algebra to find the equilibrium level of Y. (2 marks) c) Draw a diagram with output (Y) on the x-axis and aggregate demand (AD) on the yaxis. Draw two lines on this diagram: (i) Y = AD, and (ii) the aggregate demand function from part (a). Label the intercept of the AD line, and the point where the two lines intersect, with numerical values. d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What would the new equilibrium level of Y be? Illustrate your answer in the diagram you drew for part (c). e)…