EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
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Chapter 9, Problem 5AP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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If a firm believes that their relative price has changed, then they will increase their output, since their
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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?
Improved methods of inventory control were supposed to reduce fluctuations in inventory stocks. It is clear that these methods have helped reduce the equilibrium inventory/sales ratios in both the manufacturing and trade sectors over the past decade. Yet we find that during the 2001 recession, inventory investment accounted for more than the total decline in real GDP, the first time that had happened since 1949. Explain whether this result is due to a set of odd coincidences, or whether the improved methods of inventory control actually caused bigger fluctuations in inventory investment relative to final sales.
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- Question 3. Assume the following model of the economy, with the price level fixed at 1: C= 0.8(Y – T) T=1,000 G= 1,000 MIP = M/P = 0.4Y – 40r I= 800 – 20r Y= C+I+G M = 1,200 Write a numerical formula for the IS curve, showing Y as a function of r alone. (Hint: Substitute out C, I, G, and T.) Write a numerical formula for the LM curve, showing Y as a function of r alone. (Hint: Substitute out M/P.) What are the short-run equilibrium values of Y, r, Y-T, C, I, private saving, public saving, and national saving? Assume that G increases by 200. By how much will Y increase in short- run equilibrium? What is the government-purchases multiplier (the change in Y divided by the change in G)? a. b. с. d.arrow_forwardThe Paradox of Thrift: Consider the simple model of the good markets: Y = C +I+G C = Co + C1(Y – T) I = Io – hr G = G T T Saving in the simple model of the goods market is defined as S = Y C – G. (a) Using the goods market equilibrium and the definition of saving, find the pre- dicted change in aggregate savings if cOHISumers decided to save more (Co ). Explain why the effect of an aggregate increase in savings is called a paradox using your answer.arrow_forwardplease solve Q13arrow_forward
- Question Two Suppose the economy of Ghana in 2020 was characterized by C = ¢400m + 0.75(Y-T); I = ¢400m - 20r; G = ¢200m; T = ¢200m; M = ¢250m/P; Mª = 0.25Y - 10r a. Derive the IS and LM curve equations. Give a brief explanation as to why they are positively or negatively sloped. b. Calculate equilibrium output and interest rates (in this case assume P=1). Econ313 2020/2021 PROBLEM SET 2 Page 1 of 2 c. Suppose the government of Ghana in the second half of 2020 spent an additional ¢50m to mitigate the impact of the COVID pandemic on households and businesses and government tax revenue declined by 10% as a result of the lockdown in Ghana what will be the new equilibrium output? d. Will the policy in (c) above have an impact on interest rate? Briefly explain. e. What is the amount of the fiscal deficit incurred as a result of the government fiscal policies as pursued in (c) above?arrow_forwardAssuming that at equilibrium real money supply (M$/P) is equal to real money demand (Md /P), which is assumed to be a function of real income (Y), nominal interest rate (R), and technology (A) as follows: MS Y =A- R P (a) Specify the assumptions needed to uphold the prediction of quantity theory of money claiming that the ratio of money to GDP is constant in the long run.e (b) Assuming that the growth rate of Y is 4%, the growth rate of R is 0, and the growth rate of A is -1%, draw a diagram to indicate the relation between growth rate of MS (on the X-axis) and inflation rate (on the Y-axis).arrow_forwardAfter staying virtually flat for about a year and a half, the average lending rate of banks has started to show signs of decline in April after the Bank of Ghana reduced the monetary policy rate the month before. The Summary of Economic and Financial Data (May 2020) published by the Bank of Ghana has shown that average lending rate has finally moved out of its comfort zone to a step downward. Prior to recording 22.38 percent in April, the average lending rate has since the past 17 months (December 2018) not come below 23%.How would banks benefit when interest rates decrease?arrow_forward
- (A Two-Period Sticky-Price Model). Consider a two-period, sticky-price economy like the one studied in lectures 11-13. Suppose that the household’s intertemporal optimality condition is of the form C2 C1 = β P1 P2 (1 + i), where C1 and C2 denote consumption in periods 1 and 2, P1 = P2 = 1 denote the price levels in periods 1 and 2, β = 0.9 denotes the subjective discount factor, and i denotes the nominal interest rate, which must satisfy the zero lower bound (ZLB). Suppose further that the full employment levels of output in periods 1 and 2 are given by Y¯ 1 = Y¯ 2 = 1, and that the economy is always at full employment in period 2 (the long run). Part 1: Suppose the central bank sets the nominal interest rate at the level i ∗ that minimizes unemployment without overheating. Calculate i ∗ . Part 2: Suppose that due to bad expected meteorological conditions, the full-employment level of output in period 2 is revised down to 0.8. Suppose that in response to this news, in period 1 the…arrow_forwardQuantity of Output SuppliedQuantity of Output Supplied = = Natural Level of Output+α×(Price LevelActual−Price LevelExpected)Natural Level of Output+α×Price LevelActual−Price LevelExpected The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$2 billionα=$2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105, and 110.arrow_forward12) Keynesian macroeconomic model with a single-time period lag on the consumption function described is initially equilibrium with the level of investment / = 500 Y₁ = C₁₂ + 1₂ Ct = 750+ 0.5Y-1 a) Determine the equilibrium level of income Y* b) Suppose now the level of investment is increased to I = 650 in one period and reverts to the initial level in subsequent periods. What is the level of income in the period when investment is distributed? Find the time period What is the level of the twelfth period, Yt=12? i. ii.arrow_forward
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