Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 39, Problem 5RQ
To determine
Sticky price and aggregate demand.
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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 3. 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? The aggregate demand curve will shift_____ by $____ billion. In what direction and by how much will it eventually shift? The aggregate demand curve will shift_____ by $____ billion..
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?
81.Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P), and the IS curve is given by Y = 8,000 – 2,000r + u, where u is a shock that is equal to +200 half the time and –200 half the time. The price level (P) is fixed at 1.0. The natural rate of output is 4,000. The government wants to keep output as close as possible to 4,000 and does not care about anything else. Consider the following two policy rules: i. Set the money supply M equal to 1,000 and keep it there. ii. Manipulate M from day to day to keep the interest rate constant at 2 percent.
a.Under rule i, what will Y be when u = +200? What will Y be under rule i when u = –200?
b.Under rule ii, what will Y be when u = +200? What will Y be under rule ii, when u = –200?
c.Which rule will keep output closer to 4,000?
82.Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P) + u, where u is a shock that is equal to +200 half the…
Chapter 39 Solutions
Economics (Irwin Economics)
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- 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. 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_forward9. Suppose Amal calculates her permanent income by adaptive expectations . Year 2020 Amal's permanent income was 38,000 , and year 2021 actual income is 41,000 . Assume that , long - run marginal to consume is 0.90 and short - run marginal propensity to consume is 0.28 . What is her consumption expenditure year 2021 ? O 36.774 O 35,040 O 40.226 O 33.454 O 34.740 O None of the above is correctarrow_forwardExplain why proponents of Keynesian economics believe that it is unlikely for wages and prices to decrease, even if cyclical unemployment is high, and therefore the best remedy to correct a recessionary gap is through stimulating AD. How can just a little bit more extra spending in the economy lead to a much greater impact on real GDP produced? (12.2)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_forward13. Assuming that an economy’s aggregate demand is given by its domestic consumption C and investment I, AD = C + I = c0 + c1Y + I. In the economy’s goods market equilibrium, this equals its output: AD = Y. Solving for Y this yields: Y = [1/(1 -c1 )] (c0+ I) Given this equation, which of the following statements is correct? 1. The multiplier is given by 1 – c1. 2. The boost in the economy’s output is the same, regardless of whether the aggregate demand shock comes from an increase in investment I or in autonomous consumption c0. 3. The larger the marginal propensity to consume (c1), the smaller the multiplier. 4. If c1 = 1/3, then a £1 million increase in investment would result in a £2 million increase in output. 14. In the US and the UK, loans are…arrow_forwardSuppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output: a. What is productivity in this economy?b. What is the per-unit cost of production if the price of each input unit is $2?c. Assume that the input price increases from $2 to $3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy’s aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. What would be the new per-unit cost of production? What effect would this change in per-unit production cost have on the economy’s aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?arrow_forward
- 5 3. permanent Income Hypothesis a) suppose that beta=.9 and R= 2222 (that is ~22%). For an individual who acts according to the PIH, will their consumption next period be higher than current consumption or lower? b) What is the main crucial difference between the Keynesian Consumption function and the consumption function derived from the PIH (or Lifetime Income Hypothesis)? c) If Present Value of future income stream is 500,000 and a person has a beta of.8, how much will their consumption go up today if only today's income increases by 1000? How much will their consumption increase (approximately) if their income goes up by 1000 in all periods?arrow_forward#wk4-10 Suppose that the investment demand curve in a certain economy is such that investment declines by $120 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment.If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out?$ billionarrow_forwardSuppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P), and the IS curve is given by Y = 8,000 – 2,000r + u, where u is a shock that is equal to +200 half the time and –200 half the time. The price level (P) is fixed at 1.0. The natural rate of output is 4,000. The government wants to keep output as close as possible to 4,000 and does not care about anything else. Consider the following two policy rules: i. Set the money supply M equal to 1,000 and keep it there. ii. Manipulate M from day to day to keep the interest rate constant at 2 percent. a. Under rule i, what will Y be when u = +200? What will Y be under rule i when u = –200? b. Under rule ii, what will Y be when u = +200? What will Y be under rule i, when u = –200? c. Which rule will keep output closer to 4,000?arrow_forward4. Suppose that people expect inflation to equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups. a homeowner with a fixed-rate mortgage. a union worker with a fixed labor contract a company that has invested some of its endowment in a government bonds which pay a fixed rate of return. 5. Indicate how each of the following events would affect the aggregate demand AD curve: a short-run decrease in the price level an increase in consumer confidence on the price level and real GDP an increase in government purchasesarrow_forward1-)What is the difference between a real rate and a nominal rate? Say you got a raise of 10% of your salary but inflation increased by 15%, what is your real percent increase in salary? How should we use this in every day life to make changes that will make us wealthier over time. 2-) How can we use the Aggregate Supply and Demand Model to help us understand what the government is doing in the current Covid19 economic crisis? 3-) What is the basic difference between Fiscal and Monetary Policy, how are they used during recessions? 4-)arrow_forward
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