d) Suppose that for every $1 change in investment spending, aggregate demand changes by $4. Draw the new AD curve. Plot only t endpoints of the AD2 curve in the graph below. 150 Price level 140 130 120 110 100 90 400 500 600 700 Real GDP 800 900 AD₁ 1000 Tools AD2 O
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- Assume that the marginal propensity to consume is 0.75 and that taxes are exogenous. Imagine that government expenditure increases by $10m. Begin by assuming that the interest rate and prices stay fixed. 1. What is the value of the aggregate expenditure multiplier (k)? 2. How would the change be represented in an AD-AS diagram? 3. How would the change differ if the interest rate could change (assuming prices remain fixed)? 4. How would the change differ if the price level could also change?The following questions refer to this table: a.At each level of output, calculate saving. At each level of out-put, calculate unplanned investment (inventory change).What is likely to happen to aggregate output if the economyproduces at each of the levels indicated? What is the equilib-rium level of output?b.Over each range of income (2,000 to 2,500, 2,500 to 3,000, andso on), calculate the marginal propensity to consume. Calculatethe marginal propensity to save. What is the multiplier?c.By assuming there is no change in the level of the MPC andthe MPS and planned investment jumps by 200 and is sus-tained at that higher level, recompute the table. What is thenew equilibrium level of Y? Is this consistent with what youcompute using the multiplier?In each of the following cases, determine whether the IScurve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.a. The real interest rate rises.b. The marginal propensity to consume declines.c. Financial frictions increase.d. Autonomous consumption decreases.e. Both taxes and government spending decrease by thesame amount.f. The sensitivity of net exports to changes in the realinterest rate decreases.g. The government provides tax incentives for researchand development programs for firms
- Consider an economy described by the following data:C = $3.25 trillionI = $1.3 trillionG = $3.5 trillionT = $3.0 trillionNX = - $1.0 trillionf = 1mpc = 0.75d = 0.3x = 0.1a. Derive simplified expressions for the consumptionfunction, the investment function, and the net exportfunction.b. Derive an expression for the IS curve.c. If the real interest rate is r = 2, what is equilibriumoutput? If r = 5, what is equilibrium output?d. Draw a graph of the IS curve showing the answersfrom part (c) above.e. If government purchases increase to $4.2 trillion,what will happen to equilibrium output at r = 2?What will happen to equilibrium output at r = 5?Show the effect of the increase in government purchases in your graph from part (d).11. Assuming a Marginal Propensity to Save (MPS) of 20% or 0.20, use the Keynesian Multiplier to determine the additional amount of government spending required.Elaborate 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
- 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…In an economy with no government and no foreign sectors, autonomous consumer spending is $250 billion, planned investment spending is $350 billion, and the marginal propensity to consume is 2/3. a) Plot the aggregate consumption function and planned aggregate spending. b) What is unplanned inventory investment when real GDP equal $600 billion? c) What is Y*, income-expenditure equilibrium GDP? d) What is the value of the multiplier? e) If planned investment spending rises to $450 billion, what will be the new Y*?Derive the consumption function and use this relation in the aggregate demand function to derivean equation for the equilibrium in the goods market . Why the AD line is upward sloping?Suppose the government spending falls by 100 and in this case marginal propensity to consumeis 0.8. what is the value of change in output. Draw a diagram to show the shift in AD line due tothis change in government spending and output.
- Suppose that the federal government decides to reduce the budget deficit and cuts government purchases by $200 billion and raise personal income taxes by $200 billion. Suppose the MPC = .5. a. How much and in which direction would the AD curve shift because of the government spending cut? b. How much and in which direction would the AD curve shift because of the tax increase? Show your work. c. Using the above numbers, draw the AS-AD diagram and illustrate the short-run impact of the combined policy action assuming the economy begins at potential output. Label the original equilibrium with point "A" and the new short-run equilibrium with point "B". d. Describe the impact of the policy action on employment/unemployment, spending, and prices/inflation. Be sure to include the impact of the spending multiplier. e. In moving from points "A" to point "B" on the AS-AD diagram, why do firms change their production? f. Characterize the labor market at point "B". g. Describe the process of…10.1For each of the following events,explain the short-run and long-run effects on output and price level,assuming policymakers take no action. a) The stock market declines sharply,reducing consumers' wealth. b) The federal government increases spending on national defence. 10.2 In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment?Explain. a)When the investment accelarator is large or when it is small?onsider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2/3(Y – T). Planned investment is 300, as are government spending and taxes. What is equilibrium Y? (Hint: Substitute the values of equations for planned consumption, investment, and government spending into the equation Y = C + I + G and then solve for Y.) What are equilibrium consumption, private saving, public saving, and national saving?
