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- Consider an economy that uses exclusively labor and capital to produce.Suddenly, the government of the economy plans to permanently increase the level ofgovernment purchases. Please use words and figures to illustrate your answers.(1) Suppose the economy is a closed one. How does the long-run GDP of the economychange because of the increased government purchases? (2) Will your answer to (1) be changed if the economy is an open one? Explain youranswers briefly.(3) Suppose the economy is a closed one. Will the increased government purchaseschange the equilibrium interest rate?Suppose the United States economy is represented by the following equations: Z = C + I + G C = 500 + .5YD T = 600 I = 300 YD = Y - T G = 2000 a. Given the above variables, calculate the equilibrium level of output. b. Now, assume that taxes increase from 600 to 700. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?Course: Macroeconomic - IS-LM Model Prove mathematically the following: Given an increase in the proportional tax on income(t), what happens to the level of output and to the tax?" . Hint: for demostration, use the IS general function for a closed economy Y = C + I + G, where C = a + c*YD and YD = Y + TR - Y*t (where t = proportional income tax) and realize changes i.e., from "t1" to "t2"
- 1. In the Keynesian model, suppose that the economy has the following values : C = 100 + 0.75*Y G = 300 I = 200 NX = 0 (remember Y = GDP = C + I + G + NX) a) Solve for the level of equilibrium output in this economy. b) What is the MPC in this economy? What is the multiplier on government spending? (I want a specific number here, not a definition) c) Household savings is defined as income minus consumption (S = Y – C). What is the level of household savings in this economy? d) Suppose that households become nervous about the future of the economy and decide that they will consume less and save more money, so their new consumption function becomes C = 100 + 0.6*Y Solve for the new equilibrium level of output and calculate how much households end up saving. How has it changed from the level of savings in part c? e) How much does the government needs to increase its spending by to counteract the fall in economic output in this model?Assume that the economy is now governed by a government and begins trading with other economies. The economy is described by the following set of equations. ?=1000+0.5⋅?d ID = 600 G=700 T=400 EX=0.1⋅Y IM=100+0.1⋅Y YD = Y - T Calculate the equilibrium level of output Y* a) 2857 b) 4000 c) 6274 d) 4400 Whats the government expenditure multiplier? Whats the tax multiplier? Whats the ba;anced budget multiplier?In both the classical and the Keynesian model, savings equal investment in a balanced-economy equilibrium. O True O False
- Assuming that there is no government spending or trade, an economy’s GDP is the sum of domestic consumption C and investment I, i.e. Y = C+ I Assume that I is unaffected by GDP Assume the consumption function is C = c0 + c1Y In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which of the following statements is correct? choose 5 Select one or more: a. In a demand-driven economy demand is equal to supply in equilibrium b. In a demand-driven economy, supply creates its own demand c. The aggregate demand equation is given by AD = c0 + c1Y + I d. If the economy above is a demand-driven economy, then the equilibrium solution for Y is given by Y = (c0 + I)/(1-c1 ) e. In a demand-driven economy the AD curve is a vertical line f. In a supply-driven economy demand is equal to supply in equilibrium g. if c1 is a number between 0 and 1, and I+c0 >0 then the aggregate demand equation is a straight line that must intersect the…Q1: There are two equations for macroeconomic equilibrium in an economy. State them. Show (mathematically) that Savings equals Investment when expenditure equals income. What type of economy would you have when exports equal imports? What happens to the savings-investment relationship if exports are not equal to imports? [This can be greater than or less than]. [Hint: See video lecture on Open Economy Macroeconomics]. Note: Ensure to write out full meanings when you use abbreviations or short forms. This is key to getting full marks.4. a) Draw a TP-TE (or Keynesian cross) graph for South Africa. Suppose Real GDP is $425 billion while the Real GDP where TE=TP is $475 billions. total, Expenditure (billions) TE-TH HEL th I 1 45 425 Q2 475 Q1 TP - TE total Production (billions) b) If Real GDP is $425 billion, what will happen to inventories, to firm's production and to the Real GDP? Inventories will decrease and Production will increase GDP increases to $475 billion and real
- Explain with the help of a graph how we can determine the specific combination of two goods that can be produced in the economy in the H-O model.If government spending as a percent of potential GDP had just risen from 18% to 20%, what does the spending allocation model predict would be happening in our economy to consumption, investment, and net exports? Sketch out the spending allocation diagram and show any changes that might have occurred.. Let the national income model be; Y = C + I0 + G , C = a + b ( Y – T) , G = g Y Identify endogenous variables Find the equilibrium national income Find equilibrium consumption(using static equilibrium & matrix algebra both)
