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Elaborate on the difference between a binding and non-binding borrowing constraints and the
two consumption functions that result.
b. From the Intertemporal Choice Model, many theories (non-Keynesian theories of
Consumption) came into being. Using graphical and mathematical expressions, compare
and contrast the following theories on consumption behaviours:
i. Franco Modigliani: Life-Cycle Hypothesis
ii. Milton Friedman: Permanent-Income Hypothesis
iii. Robert Hall: Random Walk Hypothesis
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- Question Two a. Explain 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 Hypothesis5 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?(a) Suppose in a simple Keynesian economy, planned consumption function is given by C=250+0.65(Y-T). Planned investment, government purchases, taxes are $100 million, $100 million and $150 million respectively. What is MPC, MPS and autonomous consumption Derive the saving function. What is the equilibrium level of income? Y= AD=C+I+G If government purchases increase to $150 million, what is the new equilibrium level of income? What level of government purchases is needed to achieve an income of $2000 million? From question e) you get the newly government purchase. Now find out the multiplier value What is the amount of shift in AD curve? [Use the multiplier value from e)] (b) In a self-regulating economy “X”, labor supply is 40 million but labor demand is 10 million. What will happen in goods and service market simultaneously? Explain this situation with relevant graph. Based on your findings in a) is it denoting long run equilibrium? If not, will the economy be able to restore…
- 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.)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 Hypothesisin a closed economy with no government, where aggregate demand is determinedby autonomous consumption, investment (which is independent of output), and themarginal propensity to consume.a) Given that autonomous consumption is 20, investment is also 20, and the marginalpropensity to consume is 0.6, write out an equation for aggregate demand (AD) in thiseconomy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, usealgebra to find the equilibrium level of Y. 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 demandfunction from part (a). Label the intercept of the AD line, and the point where the twolines intersect, with numerical values. (3 marks)d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What wouldthe new equilibrium level of Y be? Illustrate your answer in the diagram you drew forpart (c). (2 marks)e) Calculate the value of…
- Hi this question is for macroeconomics but on bartleby does not show any option for macroeconomics As a result of COVID-19, the Government of Canada has been actively using a discretionary fiscal stimulus policy. Using the Aggregate Supply – Aggregate Demand model, illustrate the intended impact of this policy on Aggregate Demand. Has the fiscal stimulus policy been effective? Why or why not? When the discretionary fiscal stimulus policy has ended, what actions with respect to the budget, will the government have to consider to address the debt level resulting from the discretionary fiscal stimulus policy?Empirical evidence suggests that many consumers tend to spend all of their current disposable income immediately. Is this irrational? Discuss Hint: use at least 2 or 3 of the consumption thoeries( Keynesian consumption theory, permanent income hypothesis theory,)Consider an economy that works acoording to the classical model, and the Fisher equation holds for the money market. In this economy the consumption function is C(Y-T)=250+0.75(Y-T), the investment function is I(r)=1000-50r, where Y is income, T is net taxes and r is real interest rate. The government spends 1100 units of output on goods and services and coolects 1000 units as taxes. The labor supply is 1000, while the capital stock is 2500 units. The production function of this economy can be described as Y=K0.5L0.5. The economy is in its long-run equilibrium. The velocity of money is 2, while nominal supply of money is 6000. a) Calculate the equilibrium interest rate of this economy. b) Calculate the price level. c) What is the real wage at which the labor market is at equilibrium? What is the nominal wage? Plzzz give answer of all questions.
- Assume certain coutory economy consumption function =200+0.75(Y-T) given government purchase and Tax are 100 and investment function =100-25r real money demand =25y-100r money supply =1000 then find equilibrium income and interest rate when government purpose increase by 80 percent and tax increase by 70 percent draw IS and LM curve and by how much they shift ?a. Explain the difference between a binding and non-binding borrowing constraints and the two consumption functions that result.a) Draw a consumption function and label the axes.b) Suppose that your friend has a consumption function of the form y=1.4x+200. Is this function sustainable in the long run? Why or why not?c) Suppose that your consumption function is y=0.75+1000. What is your marginal propensity to consume? What is your autonomous expenditure?d) State the permanent income hypothesis.e) Suppose that I raise your income today by $10, and lower it tomorrow by $10. How would your behavior change according to the consumption function (aka Keynesian, aka rule-of-thumb) model? And what about according to the permanent income hypothesis model?
