Answered: The following equations describe an…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 1CQ

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The following equations describe an economy. (Think of C , I , G , etc., as being measured in Billions and I as a percentage; a 5 percent interest rate implies I = 5.)

C= 0.8(1 - t )Y

T=0.25

I=900-50i

-G=800

L = 0.25Y-62.5i

-M/-P= 500

a. What is the value of aG which corresponds to the simple multiplier (with taxes) ?

b. By how much does an increase in government spending of ∆G increase the level of Income in this model, which includes the money market?

c. By how much does a change in government spending of ∆G affect the equilibrium Interest rate?

d. Explain the difference between your answers to parts a and b.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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