attached is the homework i have questions about. the assignment is due july 1. I was unable to attend the lectures for personal reasons and the professor is holding me responsible for the assignment. Any help that can be given would be appreciated

 

 

 

1. Suppose net capital outflows are given by ????????????????=100−100???? where ???? is the quantity of funds and ???? is the real interest rate. Let domestic investment be given by ????????=300−200???? (or, more specifically since domestic investment cannot be negative, ????????=max{0,300−200????}). Suppose national saving (which will be our supply of funds) is given by ????????=50+200????. And, finally, let the demand for foreign currency exchange be given by ????????????????????????=45−???? where ???? is the exchange rate. 

a. Find the equilibrium quantity of loanable funds, quantity of capital outflows, interest rate, and exchange rate. 

b. Now suppose the government’s deficit increases by 25. Repeat part (a). 

c. Graph the equilibrium from part (a). On the same figures, graph the change described in part (b). 

 

 

 

2. Consider this question in the context of the short run model. Let money demand (in billions) be given by ????????=1,250−500√???? where ???? is the interest rate and money supply be given by ????????=500. Also, suppose that autonomous consumption is 35,000 and the marginal propensity to consume is 0.6. Government spending is 100,000, net exports are -10,000, and domestic investment is ????=200,000(1−????). Moreover, suppose output is described by the Cobb-Douglas production function ????=????????????????1−????=????√????√????; let ????=400 and let capital be fixed at ????=100 in the short run. Ignore taxes. 

a. Find the short run equilibrium output level and interest rate. Plot this using a Keynesian Cross diagram. Find the equilibrium level of employment. 

b. Suppose an energy crisis causes investment to fall (from its level in part a) by 95,000. What is the effect on output and employment? 

c. Suppose the government reacts to the crisis by increasing spending by 50,000. What is the equilibrium employment and output now? Has the government reduced cyclical unemployment? What is the government spending multiplier? 

d. No need for equations in this portion; just demonstrate using graphs. Map out what has happened in (b) and (c) on an AD-AS graph. Suppose that the output level in part (a) coincides with the long-run equilibrium level. 

i. What is the short run effect of the crisis (assuming LRAS doesn’t move)? 

ii. What is the short run effect of the government policy? 

iii. What is the long run effect of the government policy on prices? 

 

 

 

3. This time, we won’t ignore taxes. Suppose ????=205,000 and net exports are zero. Further, let autonomous consumption be 35,000 and the marginal propensity to consume is 0.75. The government spends 100,000 running a balanced budget; taxes are taken as a lump sum from households’ disposable income. 

a. Plot the equilibrium using a Keynesian Cross diagram. What is the level of output? 

b. Suppose the government increases spending without raising taxes. What happens to output (for, say, a $1 change)? What is the government spending multiplier? 

c. Ignore part (b). Suppose instead that the government increases spending but increases taxes to cover it. What is the balanced budget multiplier? What happens to output (again, say for a $1 change)? 

d. Ignore parts (b) and (c). Suppose that the government maintains spending but lowers taxes. What happens to output? What is the tax multiplier? (consider a $1 change as before) 

 

4. Now, consider the environment of question 3 but you may ignore the equations. Assume we’re in the short run with sticky prices. 

a. What effect does a deficit funded increase in government spending have on aggregate demand? 

b. What effect does this policy have in the money market? How might this lead to a smaller than expected boost in output (and what is this phenomenon called)? 

c. How might the central bank coӧrdinate with the government to make a stimulus policy more effective? 

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Status NEW Posted 12 Jul 2017 05:07 AM My Price 15.00

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