Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Chapter 20, Problem 5SQ
To determine
The indication of the interest rate effect.
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Describe the behavior of consumption, investment, labor, productivity, wages, the price level and the money supply over the business cycle both in terms of correlation, magnitude and lead vs lag. Give the economic intuition of the results on consumption, investment, productivity, wages and price levels. [Note, I am looking for the correlation between each of these items and income. Give leads and lags only when the most important correlation is not contemporaneous. You may trust the author of the book on this one.]
a) Use an appropriate diagram, to explain how the Permanent Income Theory of Consumption reconciles the results of cross-section and time series estimate of the Keynesian aggregate consumption function.
(b) With the help of a diagram, explain the effect of an increase in nominal income on interest rate.
Calculations with the IS curve: Suppose the parameters of the IS curve are a = 0,b = 3/4, r = 2% and the real interest rate is initially R = 2%. Explain whathappens to short-run output in each of the following scenarios (consider eachseparately):(a) Te real interest rate rises from 2% to 4%.(b) Te real interest rate falls from 2% to 1%.(c) ac increases by 1 percentage point.(d) ag decreases by 2 percentage points.(e) aim decreases by 2 percentage points.
Chapter 20 Solutions
Economics For Today
Ch. 20.7 - Prob. 1YTECh. 20.A - Prob. 1SQPCh. 20.A - Prob. 2SQPCh. 20.A - Prob. 3SQPCh. 20.A - Prob. 4SQPCh. 20.A - Prob. 5SQPCh. 20.A - Prob. 6SQPCh. 20.A - Prob. 1SQCh. 20.A - Prob. 2SQCh. 20.A - Prob. 3SQ
Ch. 20.A - Prob. 4SQCh. 20.A - Prob. 5SQCh. 20.A - Prob. 6SQCh. 20.A - Prob. 7SQCh. 20.A - Prob. 8SQCh. 20.A - Prob. 9SQCh. 20.A - Prob. 10SQCh. 20.A - Prob. 11SQCh. 20.A - Prob. 12SQCh. 20.A - Prob. 13SQCh. 20.A - Prob. 14SQCh. 20.A - Prob. 15SQCh. 20.A - Prob. 16SQCh. 20.A - Prob. 17SQCh. 20.A - Prob. 18SQCh. 20.A - Prob. 19SQCh. 20.A - Prob. 20SQCh. 20 - Prob. 1SQPCh. 20 - Prob. 2SQPCh. 20 - Prob. 3SQPCh. 20 - Prob. 4SQPCh. 20 - Prob. 5SQPCh. 20 - Prob. 6SQPCh. 20 - Prob. 7SQPCh. 20 - Prob. 8SQPCh. 20 - Prob. 9SQPCh. 20 - Prob. 10SQPCh. 20 - Prob. 11SQPCh. 20 - Prob. 1SQCh. 20 - Prob. 2SQCh. 20 - Prob. 3SQCh. 20 - Prob. 4SQCh. 20 - Prob. 5SQCh. 20 - Prob. 6SQCh. 20 - Prob. 7SQCh. 20 - Prob. 8SQCh. 20 - Prob. 9SQCh. 20 - Prob. 10SQCh. 20 - Prob. 11SQCh. 20 - Prob. 12SQCh. 20 - Prob. 13SQCh. 20 - Prob. 14SQCh. 20 - Prob. 15SQCh. 20 - Prob. 16SQCh. 20 - Prob. 17SQCh. 20 - Prob. 18SQCh. 20 - Prob. 19SQCh. 20 - Prob. 20SQ
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- 1. Use the AD-AS model attached to explain and illustrate the difference between demand side measures and supply side measures and give an example of each. Also mention which markets are embedded within each curve. 2. Use the AD-AS model to Analyze and illustrate the short run impact of an increase in energy prices on GDP, inflation and employment. Which type of inflation is this?arrow_forward1) The total expenditure in Macroland begins with these initial levels (in trillions of dollars): GDP = 10; autonomous consumption=1, Investment = 2; Government = 2; Net Exports = 0 and T=2. Assume MPC = 0.75. There is a sudden shock to so called business confidence leading to decrease in investment by 1. Find the change in the equilibrium level of income. 2) Inflation in Macroland is 5% this year and it is expected to remain at this rate for a foreseeable future. If true then CPI will double in around 14 years. CPI will double in around 20 years. CPI will double in around 25 years. CPI will double in around 10 years.arrow_forwarda) Nominal wages are slow to adjust to changing economic conditions. Discuss the implication of this stickiness of wage for short run aggregate supply curve with relevant example. b) Using circular-flow diagram, explain why an economy’s income must equal its expenditure.arrow_forward
- Aggregate demand and aggregate supply, based on a problem from “Principles of Economics” by N. Gregory Mankiw a) List the components of country’s GDP in an open economy. For each component, provide an example of an event that would cause a shift of the aggregate demand curve to the right.b) What will be the effect of such events on the level of prices and the real outcome in the short run? Provide a graph.c) What will be the effect of such events on the level of prices and the real outcome in the longrun? Update your grapharrow_forward(17) Assume that the economy begins in long run equilibrium and the central bank increases the target interest rate. In the short run, what happens to the level of GDP? Group of answer choices (A) It stays the same (B) It goes up (C) It goes downarrow_forwardSuppose the government provides incentives (e.g. lower company tax) to firms that engage in high levels of research and development.How would this affect firms’ allocation between different types of investment? Explain. How would this affect the interest rate? Explain. What happens to the quantity of investment overall? Explain.What happens to the short-run aggregate supply curve? Explain. What happens to the long-run aggregate supply curve? Explain. What happens to the value of the dollar? Explain.g What happens to the quantity of net exports demanded? Explain.h What happens to aggregate demand? Explain.arrow_forward
- a. Looking at business fixed investment, explain why investment is negatively related to the interest rates.b. Using the Tobin’s q theory, explain the relationship between investment and capital stock?arrow_forward7. Assume that the economy is initially operating at the natural level of output. An increase in consumer confidence will cause. A) a reduction in the real wage in the medium run. B) an increase in the real wage in the medium run. C) no change in the real wage in the medium run. D) ambiguous effects on the real wage in the medium run. E) none of the abovearrow_forwardOne reason for an increase in aggregate demand (AD) on the investment side is a a rise in the expected rate of return. b a rise in interest rates. c a decrease in business confidence. d an increase in wealth.arrow_forward
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