Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 34, Problem 4QCMC
To determine
Multiplier effect.
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In a small closed economy, its aggregate demand and output are given as the equations below,
Y = C + I + G; national output or GDP.
C = 100 + 0.5(Y-T); consumption, marginal propensity to consume MPC = 0.5.
I = 150 – 10*r; investment is a negative function of real interest rate (r as %).
(M/P)d = Y – 20*r; real money demand which is adjusted by price level (inflation).
G = 200; as government spending.
T = 200; as tax.
M = 2,400; as money supply.
P = 4; the price level.
(1) With the equations above, try to derive the IS curve.
Tip: recall IS curve represent the relation between national output (Y) and real interest rate (r) in goods market. To derive IS curve, you need to put all components of Y together and find its connection with r.
(2) Use the same equations, now try to derive the LM curve.
Tip: recall LM curve represent the relation between national output (Y) and real interest rate (r) in money market. So to derive LM curve, you need to consider money supply and demand.…
An economy is operating with output that is $40 billion below its natural level, and fiscal policymakers
want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest
rate constant, so there is no crowding out. The marginal propensity to consume is 4/5, and the price level
is completely fixed in the short run. In what direction and by how much would government spending
need to change to close the recessionary gap? Explain your thinking
Please give me answer in daetail please
An economy is operating with output that is $400 billion below its natural level, and fiscal policymakers want to close this recessionary gap.The central bank agrees to adjust the money supply to hold the interest rate constant, so there is not crowding out. The marginal propensity to consume is4⁄5′ and the price level is completely fixed in the short-run .In what direction and by how much would government spending need to change to close the recessionary gap? Explain your thinking.
Chapter 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Suppose the incoming Biden administration permanently increases taxes and government purchases by equal amounts. 1)What will be the impact (if any) on output in the short run? 2)What will be the impact on the economy’s normal real interest rate (r*) and normal investment (I*, which is the same as normal saving, S*)?arrow_forwardConsider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption.b) It will result in an increase in investment but a decrease in government spending.c) It will lead to an increase in investment and private saving.d) It will decrease investment but increase in public saving.arrow_forwardMacroeconomics Question 1) Given the following: Money supply is 1400, C = 120+0.7(Y-T). I = 200 – 10r, where r denotes the real interest rates, and T denotes the Taxation = 200, G = 400. The real money demand function (m/p = 0.1Y100r). Required: Calculate the equilibrium income and equilibrium rate of interest. II. If autonomous investment I0 increases by 300 calculate the investment multiplier (k) and analyze the impact on income (Y) and consumption (C).arrow_forward
- In an economy, the money supply growth rate is 5.0%, the equilibrium real interest rate is 1.5%, the potential growth rate is 4.0%, the economic growth rate is 1.0%, the inflation rate is 3.0%, the unemployment rate is 4.5%, and the rate of increase in the circulation speed is -2%. In this case, in an economy that pursues an inflation target of 2.0%, what is the appropriate interest rate target based on Taylor's rule? (Omit the unit and answer with the first decimal place.)arrow_forwarda. If money supply is increased by 10, what will be the new interest rate? Round your answers to one decimal place. Pabst: 5 Numeric ResponseEdit Unavailable. 5 correct.% Kokanee: 6 Numeric ResponseEdit Unavailable. 6 correct.% b. What will be the increase in investment spending as a result of this new interest rate? Pabst: 60 Numeric ResponseEdit Unavailable. 60 incorrect. Kokanee: 50 Numeric ResponseEdit Unavailable. 50 incorrect. c. If the multiplier is 3 in each economy, what will be the increase in GDP? Pabst: Kokanee: d. In which economy would monetary policy be more effective in closing a recessionary gap? Pabst Can you please help with B, Carrow_forwardAn economy is described by the following equations: C= 2,600+ 0.8(Y-T) - 10,000r IP = 2,000-10,000r G = 1,800 NX = 0 PAE = C+1²+ GANX T = 3,000, Where the definitions of each variables are the same as our lecture notes. The real interest rate, r, expressed as a decimal, is 0.10 (that is, 10 percent). a. Find a numerical equation relating planned aggregate expenditure to output. b. Solve for short-run equilibrium output. c. Show your result graphically using the Keynesian-cross diagram. d. Now, suppose that potential output Y* equals 12,000. What real interest rate should the Fed set to bring the economy to full employment? e. Recalculate question (d) for the case in which potential output Y* equals 9,000.arrow_forward
- 1- If government expenditure (∆G) is increased by AED 400, and tax (∆T) has also increased by AED 400, Marginal propensity to save is given as 0.25, what would the increase in National Income (∆Y)? 200 300 400 500 2- For an economy, the central bank has increased the money supply, what would happen to LM curve? It will shift to right It will shift to left It will not shift None of the options are correct 3- Which of the following sequence of events follows an contractionary fiscal policy? Increase in government expenditure and tax Decrease in tax and government spending Decrease in government expenditure and increase in ta Increase in government spending and decrease in Tax 4- Suppose for an economy following information is given. Consumption (C) = 40+0.75(Yd), Tax (T) = 80 Million AED ; I= 140-10r; Government spending (G) =100; Money demand = 0.2Y -5r ; Money supply = 85 million AED. a. Compute the equilibrium Income Y and rate of Interest (r) ? b. Suppose…arrow_forwardSuppose the Biden administration permanently increases government purchases. (You shouldassume that the economy is at Y* before the increase.)a. What will be the impact on the economy’s normal real interest rate (r*) and normalinvestment (I*)? Explain with the help the long-run savings and investment diagramarrow_forward
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