MACROECONOMICS (LL)
21st Edition
ISBN: 9781260186949
Author: McConnell
Publisher: MCG
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Chapter 18, Problem 5RQ
To determine
Impact of the given situations in the short run and the long run.
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For the linear IS-LM model, the goods market and the money market are in equilibrium when. Suppose that the economy is characterized by the following equations: (Y;r) = ( 1200 ; 6), Y-C-IG=0, C-Co-c(Y-T)=0,I-Io+hr=0, and kY-ur-M^s=0, which are satisfied for Co=60, lo=150, G=250, T=200, M^s=60, with the parameters c=0.8, k=0.1, h=10, and u=10. How are the equilibrium
and affected,
a) if "h" (the sensivity of the demand for investment to the interest rate) decreases to 5?
b) if "u" (the sensitivity of the demand for real money balances to the interest rate) decreases to 5?
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 4. 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? In what direction and by how much will it eventually shift?
How has the Federal Reserve used monetary policy and how has the Federal Government used fiscal policy to lessen the impact of the COVID-19 recession?
A) The Federal Reserve has expanded the money stock while the Federal Government has decreased its spending.
B) The Federal Reserve has contracted the money stock while the Federal Government has decreased its spending.
C) The Federal Reserve has contracted the money stock while the Federal Government has increased its spending.
D) The Federal Reserve has expanded the money stock while the Federal Government has increased its spending.
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- 9. True or false? If the statement is false, explain why: LO4 a. An internally held public debt is like a debt of the left hand owed to the right hand. b. The Federal Reserve and federal government agencies hold more than half the public debt. c. As a percentage of GDP, the federal debt held by the public was smaller in 2010 than it was in 1990. d. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world’s advanced industrial nations.arrow_forward(a) Suppose the price level in an economy rises while the money wage rate remains constant. What happens to the quantity of real GDP supplied. How will this affect the aggregate supply or aggregate demand curve? What if the potential GDP increases? Which aggregate curve is affected and how? (b) Real GDP Consumption Planned Investment Government Purchases Net Exports $1,000 $1,000 $100 $150 -$50 2,000 1,900 100 150 -50 3,000 2,800 100 150 -50 4,000 3,700 100 150 -50 From the table data provided, answer the following questions. The numbers in the table are in billions of dollars. Show all calculations. a. What is the equilibrium level of real GDP? b. What is the Marginal Propensity to Consume? c. What is the multiplier value in this economy? d. If potential GDP is $4,000 billion, is the economy at full employment? If not, what is the condition of the economy? e. If the economy is…arrow_forwardIt is known that the aggregative economic variables are as follows: Cash demand for speculation : L2 = 100 - 400r The amount of money in circulation = 200 Money demand for transactions and in case: L1 = 0.2Y Savings : S = -110 + 0.2Yd Investment: I = 150 - 600r Tax Tx = 12.5 + 0.25Y Government Expenditure: G = 160 Question : a. calculate the interest rate and national income at the time of general equilibrium? b. How much money is demand for speculation? c. What is the investment volume on balance?arrow_forward
- Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below: a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output? Explain.b. Why will a price level of 150 not be an equilibrium price level in this economy? Why not 250?c. Suppose that buyers desire to purchase $200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What factors might cause this change in aggregate demand? What is the new equilibrium price level and level of real output?arrow_forwardConsider the following economy: Labor supply: Nt= 90 Capital stock: Kt = 90 Government spending: Gt = 20 Tax collections: Tt = 20 Production function: Yt = 2(Kt)0.5 (Nt)0.5 Real money demand Lt = 2Yt - 200rt Consumption function: Ct = 16 + 0.8(Yd)t Domestic price level: Pt = 4 Investment function: It = 25 - 50rt Nominal money supply: Mt = 1296 1.Is this a short-run level of output also a long-run equilibrium? Explain. 2.Suppose that the government decreases taxes to T=10. Find the new short-run equilibrium levels of output and interest rate 3.Find the long-run equilibrium levels of output, interest rates and prices. Graph this combination of policies both in the short and in the long run. 4.Explain how the adjustment from the short-run to the long-run occurs.arrow_forwardSuppose 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 4. a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level?arrow_forward
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