Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Chapter 16, Problem 5QAP
a
To determine
To show:Impact on current output, interest rate, current private spending when FED will not change its current real policy interest rate.
b
To determine
To know:Impact on current output, interest rate, current private spending when FED will act to prevent change in current and future output.
c
To determine
To Know:Impact on current output, interest rate, current private spending when FED will not change either current real policy interest rate or the future real policy.
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Consider a 2-period economy populated with consumers that have the same income and the same preferences. There is also a government whose objective is to spend 60 in period 0 and 150 in period 1. This government can issue bonds in period 0. Each bond pays an interest rate r. Consumers can also issue bonds at the same interest rate. Consumers' optimal decisions, given r, imply that aggregate consumption C0* is equal to 2/3(Yo – To) + 2/3(Y1 – T1)/(1+r). Suppose that Yo = 300 and that income is expected to remain at this level in period 1.
A major recession begins in period 0. As a result, economic activity falls by 18 in period 0. National income is expected to fall by 20 in period 1. Consumers believe these economists.
a) Use a graph to explain why the equilibrium interest rate r falls from 0.25 to 0.2 in period 0 because of this recession.
c) Economists were wrong. The recession does not continue into period 1 so that y1 remains at 300. How does this new information affect consumers?…
Question: 1
State whether the following are true, false, or uncertain, and provide reasons for your answers. Use appropriate diagrams and/or equations, where relevant, to aid your explanations:
d) An increase in a household's ability to borrow would lead to an increase in their marginal propensity to consume.
e) The only way to reduce government debt in an economy is for the government to continuously run budget surpluses.
f) Countries with aging populations often see decreases in their debt-to-GDP ratios, ceteris paribus.
g) Increasing the degree of central bank independence over time has made it harder for them to resist short-term political pressure leading to upward pressure on inflation.
Consider a hypothetical economy characterized by the following behavioral equations.
IS LM
C=400-200r+0.2Y Md=Y-1000r
I= 240-400r Ms=800
G=200 P=2
a) Show the impact of expansionary monetary policy which is an increase in tax by 50.
b) Show the impact of expansionary fiscal policy which is an increase in nominal money supply by 100.
c) Using balanced budget multiplier show the impact of an increase in government expenditure and tax by 50.
Chapter 16 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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