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!)
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- In the IS/LM model, the fiscal policy multiplier with respect to interest rates is (α corresponds to alpha as defined in the lecture notes) αh/(h+αdk) -1/(h+αdk) k/h αk/(h+αdk) αd/(h+αdk)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: a) Using the AD-AS model and IS-LM model illustrate the impact of an expansionary fiscal policy. Label the initial points in both diagrams as A and the new points following the policy change as B.True or false? Why?"A temporary tax rise never has a significant effect on current consumption."
- 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. Using the AD-AS model and IS-LM model illustrate the impact of an expansionary fiscal policy. Label the initial points in both diagrams as A and the new points following the policy change as B.Comparing the simple Keynesian model with the IS-LM model, in the IS-LM model a. the balanced budget multiplier is larger. b. the government spending multiplier is larger. c. the tax multiplier is smaller. d. there is no difference between any of the multipliers.use analytic exposition and an appropriate diagram, to explain how the permanent income theory of construction reconcile the results of cross- section and time -series estimates of the Keynesian consumption function
- 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 1In the IS-LM model, when the government increases government purchases, the interest rate goes up; higher interest rate results in a decrease in tax revenues known as the "crowding out effect" true or falseConsider the Aggregate expenditure model. Where:AD = C + I + G + NX where G, and NX are all autonomous.C = C + c∗(Y + T R − T A) where T A = tY with t ∈ [0, 1] is the proportional tax rate and c∗ ∈ (0, 1) is the marginal propensity to consume. In addition, investment is given by: I = I − bi where I is autonomous investment and b > 0 determines the sensitivity ofinvestment to changes in the interest rate, i. A. Using the information above, solve for the IS function. Combine all the autonomous terms into one term, A. B. In an (x, y) plane, where Y is on the horizontal axis and i is on thevertical axis, illustrate the IS curve you derived above. Make sure to explainhow you got the Y-intercept and solve for the slope. c. How does c∗ affect the slope of the IS curve? Explain your answerintuitively. d. Consider the LM curve, where the real demand for money is such that:MD/P= kY − hi where k ∈ (0, 1) represents how sensitive the demand for money is to changesin income (or the inverse of…
- The fiscal multiplier is higher in the Keynesian Cross model compared to the IS-LM model True or falseUse the following versions of the IS-LM model to answer all sections: Question: c. determine the equilibrium value of Y, if M = 2,200, P = 1, and Yp = 4000 d. Based on the results of question point c, does the government budget experience a surplus, deficit, or balance?Assume i=0%, beta=1. Consumer has income of 80 in year 1, 100 in year 2. Now suppose gov't gives consumers a free check of 10 in year 1. Suppose consumers are naive (they don't anticipate the free check is financed by borrowing from China, which needs to be paid back through more tax in period 2). Consumer believes they will consume ____ in year 2. Hint: when consumers are naive, they will believe they have 80+10=90 income in period 1, and 100 income in period 2.
