Question 3. In this question, we consider optimal policy to Covid in IS-LM framework. Suppose that due to Covid, households expectation about future become pessimistic. Assume that government spending is fixed at G, tax revenue is fixed T, and economy is closed. a) How would you model this change in IS-LM model? What happens to IS curve? What happens to LM curve? Why? b) Draw IS-LM curves before and after the shock. What is the optimal monetary policy to recover the output? Illustrate the impact of this policy on a graph with IS-LM curves. Please draw a new graph.
Q: Suppose that a firm is producing in the short run with output given by: Q = 68L-L2 The firm hires…
A: The equilibrium exists at a point where the demand for labour and the supply of labour will be…
Q: If there is only one supplier of a good or service, why? How is its monopoly protected?
A: A market arrangement known as a monopoly has just one vendor who has complete market control.…
Q: for th below two machines and based on AW analysis which machine we should select? MARR=10%. Machine…
A: Machine A Machine B First Cost 25,433 100,000 Annual Cost 12,199 7000 Salvage Value 7,603 -…
Q: If a firm quadruples (4x) in size and output increases sixfold (6x), what is the returns to scale?…
A: Returns to scale are the quantitative changes in output induced by a proportionate increase in all…
Q: Pedro, a retired economics professor, grows lemons and oranges in his back- yard. He consumes some…
A: Given information Pedro's utility function U= Min(X,Y) An endowment of lemon (X)=20 pounds…
Q: Let's suppose you have $1 million to invest. You are considering to invest in UK first, then…
A: Covered interest rate arbitrage is the practice of utilizing favorable interest rate differentials…
Q: A 10 percent decrease in the price of a Pepsi decreases the demand for a Coca- Cola by 50 percent.…
A: 10% fall in the price of Pepsi demand for Coca-cola decreases by 50%
Q: Draw YOUR indifference curve for the consumption of two goods (you pick the goods – be creative!)…
A: A consumer is a rational person who wants to gain the maximum satisfaction level from paying the…
Q: Mary has the following utility function: u(x, y) 3 ln(x) + 2y. Her income is given by I = 10 and the…
A: When the price changes the quantity demanded also changes and this change is called the price…
Q: Economy grows because: A. Labor force and capital stock grow. B. A country engages in foreign trade.…
A: The process by which the economy's final commodities and services increase is known as economic…
Q: A food manufacturer is trying to maximize profit by selling wheat-based cereal (C) and wheat…
A: Cereal C = 31wc - 1.5wc2 Bread. B = 66wb - 2wb2 Constraint. wc + wb = 9055
Q: Dr. Pepito Perigrino wishes to have Php150,000.00 when he retires 15 years from now. If he can…
A: Here since the person is depositing fixed amount in the fixed intervals, hence this is called…
Q: Problem 5 Based on the graph below, explain what would happen to the optimal level of abatement if…
A: The Optimal Level of Abatement refers to the costs incurred by the firms that are likely to cause…
Q: Joan has the following utility function: u(x, y) = 5x + 3y. Consider that income is I = $8, and…
A: Perfect substitutes are the type of goods that serves the same purpose for the consumers and hence…
Q: A fast-food restaurant faces two types of consumers and is deciding on a bundling strategy. The…
A: If a producer produces more products then he may want to sell in it bundles as well. Pure bundling…
Q: At price UA, economic profits are:
A: In the case of economic profit, The price must be greater than the Average total cost or ATC. If it…
Q: A firm's production function is q= f(K, L) = 7. K¹/2L¹/3. Capital is only available via a long term…
A: q = 7K1/2L1/3 K=100 p=$84 w=$40
Q: Derive the Harrod-Domar growth equation, starting with K(t+1) = (1 - 6)K(t) + 1(t) where: K(t) =…
A: Harrod-Domar's model is one that describes the growth rate of the economy in terms of investments…
Q: Risk can be defined as the effects of uncertainty on objectives and often manifests itself in risk…
A: Risk means uncertainty. Risk is a part and parcle of life because life consists of uncertainty…
Q: Which is NOT a good practice for choosing a model? Select one: a. Considering theories,…
A: The residuals will be scattered randomly above and below the horizontal axis when a linear model is…
Q: Exercise 3. Consider the model economy where the government taxes consumption and uses the tax…
A:
Q: Your current prices are $311 in the Southwestern region; $278 in the western-region and $240 in the…
A: Price elasticity of demand refers to the ratio of the percentage change in quantity demanded with…
Q: In the IS curve: y = ̄a − ̄b(r − ̄r) Suppose the parameters are ̄a = 0, ̄b = 1/2, ̄r = 2% and…
A: With varying levels of output and interest rates, the IS curve is used to illustrate an equilibrium…
Q: - (This is problem 5, page 239 of the textbook.) Two countries are identical in every way except…
A: The Solow growth model is a macroeconomic theory that seeks to explain how capital accumulation,…
Q: You have the following data for product X: sales revenue $14,000, allocated fixed costs $12,000,…
A: Profitability is a proportion of an association's benefit comparative with its costs. Associations…
Q: QUESTION 5 For the below ME alternatives, which machine should be selected based on the AW analysis.…
A: Machine A Machine B Machine C First Cost 15,000 30000 12,557 Annual Cost 15,083 6000 4000…
Q: Use the relation MPK (K, L) MPL(K, L) a) Jerseys b) Caps c) Scarves d) Shorts. r W to determine if…
A: Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…
Q: Calculate the percent change in the price of an office chair from 2010 to 2018.
A: Percentage increase in price is called the inflation rate. The percentage decrease in price is…
Q: A firm's cost curves are given in the following table. 9 0 1 2 3 4 5 6 7 8 9 10 i) ii) iii) iv) TC…
A: TC(total cost) is the sum of fixed(TFC) and variable (TVC) costs. ATC(average total cost) is the…
Q: a.Why is it important to manage Globalisation? b.What are the consequences of NOT managing…
A: Globalization refers to the opening of trade between countries around the world such that everyone…
Q: The graph on the right depicts real money supply. 1.) Using the three-point curve drawing tool, draw…
A: Real money is a generally used term in the financial markets to signify a fully funded, long-only…
Q: Analyze below the Cash Flow and compute for the unknown value.
A: The annual worth method or AW method implies that all the incomes along with disbursements, regular…
Q: QUESTION 9 Global trade leads to: OA. New industries. B. Declining industries C. New technologies. O…
A: When any country initiates trading beyond its domestic boundaries then it is termed international…
Q: All of the major orthodox approaches to macroeconomics presume that money is neutral at least in the…
A: Neutrality of money The concept of monetary neutrality holds that changes in the stock of money…
Q: An end-of-aisle price promotion changes the price elasticity of a good from −3 to −4. Suppose the…
A: Lerner index: (P-MC) / P = -1 / Ed Where P is profit maximizing price MC is marginal cost Ed is…
Q: Qu If a firm is a price taker, its marginal revenue is O greater than market price O a multiple of…
A: A perfectly competitive firm is a price taker, which means it takes the price determined by the…
Q: QUESTION 4 For the below ME alternatives, which machine should be selected based on the AW analysis.…
A: Machine A Machine B Machine C First Cost 15,000 26,460 10000 Annual Cost 8,701 6000 4000…
Q: TC = 188 +38Q + 4Q² What is the average fixed cost when 18 units are produced? Enter as a value.…
A: As given TC = 188 + 38Q +4Q2 Total cost function is the sum of total fixed cost and Total variable…
Q: 2. Can Giffin goods also be normal goods?
A: The kinds of goods that people buy depend on their personal income. When people have very high…
Q: Increase in demand for domestic goods is due to Select one: a) Floating Exchange rate b)Direct…
A: Floating exchange rate: floating exchange rate is just a system of exchange rate followed by the…
Q: Dr. Pepito Perigrino wishes to have Php150,000.00 when he retires 15 years from now. If he can…
A: This is an example of annuity due whose future value formula is mentioned below: F = m * ((1+R)n -…
Q: One characteristic of perfectly competitive markets is that individual firms O engage in product…
A: Depending on the firms' profits, entry and exit take happen. In order to enter a market structure,…
Q: The nation's commodity terms of trade times the productivity index in its export sector gives the…
A: Introduction Trade is an activity of buying and selling of goods for money or other goods.
Q: Hero borrowed P 200,000.00 with interest at the rate of 5% compounded semi-annually. He agrees to…
A: Given that, Borrowed amount = 200,000 Rate of interest = 5% (Compounded Semi-Annually) Semi-Annual…
Q: Companies are inclined towards specialization and differentiation of their products and services.…
A: Since you have asked multiple questions, we will solve the first question for you. If you want any…
Q: Dr Rafiu is planning to send his son to study Finance either at KFUPM or Imam Abdulrahman Bin Faisal…
A: Price elasticity of supply is described as the % change in quantity supplied caused by a provided %…
Q: A computer production facility has a daily demand rate of 6 and a daily production rate of 20. Set…
A: EPQ(Economic production quantity) is an optimum quantity for a good/item that is produced by the…
Q: Three investments are being studied by Bright Star Construction Limited. The table below provides…
A: Given Cash flow MARR=12% Final cash flow for the 3 plans Year Investment 1 Investment 2…
Q: The following problems require the use of the graph below. Make sure that you are clear in doing any…
A: Abatement Cost is defined as the cost or expenditure that tends to reduce pressure on the natural…
Q: (This is problem 7, page 239 of the textbook.) An economy has a per-capita production function y =…
A: Given information Per capita production function y=Akαh1-αy--per worker outputk--capital labor…
Step by step
Solved in 2 steps with 2 images
- 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)…What happens is the IS-MP model if most people are sent $1400 like in the Biden Rescue Plan? (Notice the answer choices all avoid saying “output gap increases/decreases” because that is confusing in real life. If the output gap goes from -4 billion to -5 billion did the gap increase or decrease? The textbook’s proposed solution is to say “more positive” or “more negative.”) output gap more positive, interest rate rises output gap more positive, interest rate does not change output gap more negative, interest rate rises output gap more negative, interest rate does not changeAssume the economy is at YFE. In the full SR model, IS-LM, show what will happen if firm confidence falls, cet. par. What will happen to the components of the goods market? Use directional arrows to show and explain all these changes. Who should do what if FE is the goal of policy?
- in 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…Consider two standard Keynesian models. In Model 1, there are two types of consumers, Type A,who have low marginal propensities to consume, and Type B, who have high marginalpropensities to consume. In Model 2, there are only Type A consumers. Then, a decrease in theexogenous taxes would lead to higher output in Model 2 than in Model 1Assume 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.)
- 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.Q 1. General Equilibrium Model: Government Expenditure ShockLet us consider the following economic shock. By the distribution of stimulus check to residence during pandemic, the autonomous government expenditure G increased by ∆G. Use the 5-diagram GE model to analyze the impact of this shock. By convention, the initial position of variables are labeled with subscript 1; the short-run equilibrium are labeled with subscript 2 and long-run equilibrium are labeled with subscript 3. Suppose after the shock, the economy temporarily stays at the short-run equilibrium, then the output gap Y2 −Y1 is _ 0.A >B <C =D incomparable with The inflation gap π2 −π1 is _ 0.A >B <C =D incomparable withIllustrate the impact of a $500 million increase in government spending by adjusting the graph. In the full Keynesian model, the marginal propensity to save (MPS) is 0.25. Aggregate expenditure (in millions of dollars)Aggregate income = real GDP (in millions of dollars)AE = AIC+I+G+X−M What is the resulting change in output? Output decreases by $2,000 million, or $2 billion. Output increases by $500 million×1.33$500 million×1.33 , or $666.6 million. Output decreases by $500 million×1.33$500 million×1.33 , or $666.6 million. Output increases by $2,000 million, or $2 billion. If the government cut taxes by $500 million instead, what would be the resulting change in output? Output decreases by $1,500 million, or $1.5 billion. Output increases by $666.6 million. Output increases by $1,500 million, or $1.5 billion. Output decreases by $500 million×0.25$500 million×0.25 , or $125 million.
- Question 1 (14 marks) Consider the following numerical example of the simple Keynesian model with no government spending, taxes or a foreign sector (all figures in R millions): C = 100 + 0,9Y I = 50 Answer the following questions. What is the value of the marginal propensity to consume (MPC) in this model? (2) What is the value of the multiplier in this economy? (3) Calculate aggregate spending in this economy (2) Calculate the equilibrium level of output. (3) Suppose the level of output that creates full employment (Yf) in the economy is 1 800. Determine the level of investment spending that would create full employment in this economy. (4)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.Consider an economy in which the LM and IS functions are given below. Suppose the economy is purely classical so that yt=ý Then these equations can be condensed to LM mt - pt = y + c2Rt + εt, c2 < 0 IS Rt = r + Et(pt+1 - pt) + nt For simplicity, delete εt. Then assume that the monatery authority creates money according to MP mt = u0 + u1t + et Assume that et and nt are white noise and find the solution for pt and then for Rt.