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.
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- 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!)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?In the year of 2019, the U.S. economy produced a total output of $20.75 trillion. During the same year, the U.S. federal government spent $7.88 trillion. The desired consumption and desired investment in the U.S. for the year is described by: Cd=15-150r, Id=10-200r Where Cd is the desired consumption in trillions of $, Id is the desired investment in trillions of $, and r is the real interest rate in decimal form. if the average real interest rate during the year 2019, is 4.1%, how much is the desired national saving, Sd, in trillions of $? round answer to at least 2 decimal places.
- 19. In the short-run macro model, if the MPC equals 0.9 and investment spending rises by P200 billion, then equilibrium GDP will rise by a. P20 billion b. P180 billion c. P90 billion d. P1,000 billion e. P2,000 billion2. 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.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
- With the help of an IS-LM diagram, explain the effects of an increase in government spending on on current output, the current interest rate, current aggregate spending. (It’d be better to explain it with diagram, thank you!)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).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?
- Suppose that Dell Corporation has 20,000 computersin its warehouses on December 31, 2019, ready tobe shipped to merchants (each computer is valued at$500). By December 31, 2020, Dell Corporation has25,000 computers ready to be shipped, each valuedat $450.a. Calculate Dell’s inventory on December 31, 2019.b. Calculate Dell’s inventory investment in 2020.c. What happens to inventory spending during theearly stages of an economic recession?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.How does a change in the interest rate affect aggregate investment ? What if firms prefer to pay for investment spending out of retained earnings ? Does a change in the interest rate still affect aggregate investment Does the amount of government spending in an econ omy respond directly to changes in aggregate income , wealth , or interest rates ? Does it respond indirectly to changes in these variables ?
