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14) Detail the workings of the New Keynesian Dynamic Stochastic Equilibrium model.
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- QUESTION 5Imagine the following simple Keynesian macroeconomic model for a closed economy.TD = C + Ip + G (total demand)C = C0 + YD (aggregate household consumption)YD = Y − T (aggregate household disposable income)Ip = I0 + aY − bR (aggregate planned investment)Y = TD (output, equilibrium condition)BB = T – G (government budget balance)With:G government consumption, T taxes, R real interest rate (exogenous variables)C0) and I0 autonomous consumption and investment0 < a, c, a+c < 1, b > 0 constant parametersDerive the equation for output and answer the following question. If the government in this model simultaneously increases its consumption G and its taxes T by the same amount, then: total demand decreases, and equilibrium output declines. total demand decreases, and equilibrium output declines, but only if C > G. total demand increases, and equilibrium output rises. The rise of output is stronger the higher the households’ marginal propensity to consume. total demand…Question 1 a) Carefully explain the major differences between the Keynes’ and Fisher’s models ofconsumption.Macroeconomics Question No.5 State whether the following statements are true, false or uncertain. Also provide the explanation of false statements: The higher the level of income, higher will be the marginal propensity to consume. If marginal propensity to consume increases, aggregate demand curve will become flatter. The value of marginal propensity to consume must lies between 0 and 1. There is a direct relationship between interest rate and money supply. Government will use expansionary fiscal policy to control inflation.
- Complete the following table by matching the macroeconomic assumptions about aggregate supply to the appropriate school of thought. Assumption Classical Keynesian Only an increase in aggregate demand can move an economy out of a recession and back to potential real GDP quickly. Product prices and wages tend to be inflexible. The following graph shows the aggregate demand (ADAD) and aggregate supply (ASAS) curves for a hypothetical economy that is currently operating below its full-employment output level. That is, the economy is currently in a recession. The aggregate supply curve (ASAS) in this diagram is consistent with the view of aggregate supply. According to this viewpoint, the government should spending in response to the recession. Shift the appropriate curve on the graph to illustrate the impact of this change in government spending. ADASPRICE LEVELREAL GDP (Trillions of dollars)AD AS The prescribed…At the macroeconomic equilibrium, the economy has _______ gap, so to return to full employment _________. A. an inflationary; the money wage rate rises and aggregate supply increases B. a recessionary; the money wage rate falls and aggregate supply increases C. an inflationary; the money wage rate rises and aggregate supply decreases D. a recessionary; the money wage rate rises and aggregate supply decreasesCarefully explain the major differences between the Keynes and Fisher models of consumption
- 1 Fully develop (mathematically and graphically) the Keynesian Cross (Expenditures=Output) model. Be explicit regarding what variables are endogenous and what variables are exogenous.explain the role of supply side policy in macro economic policyA. Illustrate and explain the impact that changes in the money supply have in the economy through a neoclassical perspective. B. Illustrate and explain the impact that changes in the money supply have in the economy through a Keynesian perspective.