Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 29, Problem 8TY
To determine
Find the equilibrium
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Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200.Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800.
Calculate the equilibrium r and Y. Calculate the government spending multiplier.
Question 40
According to liquidity preference theory, if the price level increases, then the equilibrium interest rate
Answer
rises and the aggregate quantity of goods demanded rises.
rises and the aggregate quantity of goods demanded falls.
falls and the aggregate quantity of goods demanded rises.
falls and the aggregate quantity of goods demanded falls.
Question 41
If the MPC = 3/5, then the government purchases multiplier is
5/3
5/2
5
1.5
Question 42
If the multiplier is 5, then the MPC is
Answer
0.05
0.5
0.6
0.8
Question 43
In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is
Answer
$151.25.
$166.75.
$170.20.
$175.00.
Question 44
If the MPC is 0.80 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by
Answer
$80 billion.…
Consider an economy described by the following equations.
Y=C+I+G
C=100+.75(Y−T)
I=500−50r
G=125
T=100
Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest.
Question:
1. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output?
2. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output?
Chapter 29 Solutions
Economics: Principles & Policy
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- Suppose a liquidity trap situation exists. Which of the following is most likely to occur if taxes are cut? A) no change in output and no change in the interest rate B) an increase in output and an increase in the interest rate C) an increase in output and little change in the interest rate D) an increase in output and a reduction in the interest rate E) none of the abovearrow_forwardSuppose that with the liquidity facilities and asset purchase programs, the Bank of Canada increased the money supply. How do you expect this to affect consumption and investment in equilibrium?arrow_forwardThere is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct? A) By themselves, both the change in the output and the change in the interest rate decrease desired investment. B) By themselves, both the change in output and the change in the interest rate increase desired investment. C) By itself, the change in the output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending. D) BY itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.arrow_forward
- Describe the policy mix that would result in each of the following situations. a. The interest rate decreases,investment increases,and the change in aggregate output is indeterminate. b. Aggregate output increases,and the interest rate change is indeterminate. c. The interest rate increases,investment decreases,and the change in aggregate output is indeterminate. d. Aggregate output decreases,and the interest rate change is indeterminate.arrow_forwardExplain two of the channels through which lower interest rates stimulate consumption by households.arrow_forwardMost economists agree that individual consumers and business cannot pull the economy out of a severe recession without help from either the government or the Federal Reserve. Which group(s) believe fiscal policy is ineffective: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the short run: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the long run: Keynesians or Monetarists? Briefly explain the answer.arrow_forward
- Assume that the money demand function is (M / P) ^ d = 2, 200 - 200r , where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The consumption function is given by C = 200 + 0.5(Y - T) and the investment function is I = 1.000 - 200r , where r is measured in percent , G equals 300, and T equals 200. a) What is the equilibrium level of interest rate determined at the money market?arrow_forwardThe government decreases current taxes, while holding government spending in the present and the future constant. Using diagrams, determine the equilibrium effects on consumption, investment, the real interest rate, aggregate output, employment, and the real wage. What is the multiplier, and how does it differ from the government expenditure multiplier? Now suppose that there are credit market imperfections in the market for consumer credit, for example due to asymmetric information in the credit market. Repeat part (a), and explain any differences in your answers in parts (a) and (b)arrow_forwardPlease complete the two attached graphs and answer the following questions for this. A. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2.5 billion. Based on the changes made to the money market in the previous scenario, would the new interest rate causes the level of investment spending to Rise or Fall? And by $1.02 billion, $0.62 billion, or $2.5 billion? B. Taking the multiplier effect into account, will the change in investment spending cause the quantity of output demanded to decrease or increase? And $1.2, $2, or $5 billion at every price level? C. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the crowding out, automatic stabilizer, multiplier, or liquidity preference effect?arrow_forward
- 5.Consider an economy in which government purchases, taxes, and net exports are all zero. The consumption function is C = 300 +.75Y and investment spending (I) depends on the rate of interest (r) in the following way: I = 1,000 - 100r Find the equilibrium GDP if the Fed makes the rate of interest (a) 2 percent (r=0.02), (b) 5 percent, and (c) 10 percent.arrow_forwardThe following parameters describe the structure of a hypothetical economy: Autonomous consumption=240 Autonomous investment=1000 Autonomous taxes=100 Autonomous government expenditure=400 Real money supply (M/P)=600 Tax rate=0.25 Marginal propensity to consume=0.8 Interest elasticity of investment=50 Interest elasticity of demand for money=62.5 Income elasticity of demand for money=0.25 a) Determine and explain the relative effectiveness of fiscal and monetary policies and State the values of the fiscal and monetary policy multipliers if the economy is in a liquidity trap. Explain. b) Use your answer in part a) above to determine equilibrium income and interest rate. c) If government expenditure is increased by 150 units, show how equilibrium interest rate and equilibrium income will change. Can you determine the extent to which investment is crowded out as a result? Explain.arrow_forwardIn the figure above, assume that output is $10.5 trillion, while potential output is $12 trillion. If a fiscal stimulus package is implemented quickly, raising output to $12 trillion, while inflation remains constant at one percent, then the figure implies that the real interest rate will be ________ percent. A) 1.5 B) zero C) one D) 0.5 E) 2.5arrow_forward
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