Suppose an economy existed in which investment, net exports, and consumption were not sensitive to changes in interest rates. For this economy, the AD curve would O have a slope less than 1 but greater than zero. O be horizontal. O have a negative slope. O be vertical. have a slope equal to 1.
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- 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 firmsConsider the IS curve where consumption depends on the present discounted value of income. Suppose the parameters of the IS curve are: bbar_c = 0.5; abar = 0; bbar = 1; rbar = 2% and the real interest rate is initially R = 3%. A. Is the economy in its long-term equilibrium? Explain. B. Suppose the real interest rate decreases to 2 percent; what happens to the short-run equilibrium, holding everything else constant? C. What happens to the short-run equilibrium if abar increases to 5 percent, holding everything else constant?QUESTION TWOConsider the consumption function is given byC = 200 + 0.75YDWhere YD is disposable income Suppose that the economy faces an investment function of the formI = 200 – 25r.Suppose further that G =T = 100 and the money demand function takes the form(M/P) = Y – 100r.The money supply M is 1,000 and Price level P is 2Required:(i) Formulate the IS equation and the LM equation.(ii) Find the equilibrium interest rate and the equilibrium level of income. (iii) If government expenditure increases by 50, by how much does the IS curveshift? (iv) If the money supply increases by 200. How much does the LM curve shift?
- Assume that Andrew Marcus is 25 years old and expects to live until the age of 75. (a) If he wins €20 million in cash (after taxes) in the lottery and retires, how much will he consume each year if he wants to have constant consumption and use up all his wealth by the time he dies? Assume the real interest rate is zero. (75 words max) (b) If his total income in the year he wins the lottery is his lottery winnings, what will his average propensity to consume be for that year? (75 words max) (c) If he has no other earnings in later years but continues his constant consumption, what will his average propensity to consume be for those later years? (75 words max) (d) What is Andrew's "permanent income" in the year he wins the lottery? What is his "transitory income"? (75 words max)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).Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy�s multiplier is 3. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? The aggregate demand curve will shift_____ by $____ billion. In what direction and by how much will it eventually shift? The aggregate demand curve will shift_____ by $____ billion..
- Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending takes us to a new equilibrium with ________ income and ________ interest rate. Select one: a. an unchanged, a higher b. higher, a lower c. higher, a higher d. lower, an unchanged2. In the IS-LM model, what is the effect of an increase in government purchases? Draw an IS-LM diagram to illustrate. In this question, it is not necessary to include the FE line. a) What is the effect on output and the real interest rate? b) What is the effect on investment spending? c) If the LM curve had been horizontal, explain how your answers to a and b would have been different.Assume the economy has positively sloped AS curve. A leftward shift of the AD curve will result in O A. a decrease in prices and no change in real GDP.OB. an increase in both real GDP and prices.O C.a decrease in both real GDP and pricesO D.an increase in prices and no change in real GDPO E.an increase in real GDP and no change in prices.OF. a decrease in real GDP and no change in prices.
- Suppose the incoming Biden administration permanently increases taxes and government purchases by equal amounts. 1)What will be the impact (if any) on output in the short run? 2)What will be the impact on the economy’s normal real interest rate (r*) and normal investment (I*, which is the same as normal saving, S*)?With the help of an IS-LM diagram, explain the effects of an expected future tax increase on current output, the current interest rate, current aggregate spending. (It’s be better to explain with diagram, thank you!)22. What could have caused the Investment function to move from I1 to I2? 23. Assuming that the Investment function moves from I1 to I2, and assuming the market rate of interest in at 15%, by how much would investment spending decrease?