ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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- Suppose the consumption function is C=$800 billion + 0.8 Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with Instructions: Enter your responses as a whole number. a. a $100 billion increase in government purchases? $ billion b. a $100 billion tax cut? billion c. a $100 billion increase in income transfers? billion What will the cumulative AD shift (after multiplier effects) be for d. the increased government spending? billion e. the tax cut? billion f. the increased transfers? billionarrow_forwardGiven a consumption function, C = co + cY, specified such that the marginal propensity to consume is 75%, how much will C increase by if Y increases by £3bn? a. £0.75bnb. £2,250mc. £2bn d. £1,500marrow_forwardWith the help of an IS-LM diagram, explain the effects of an increase in government spending on on current output, the current interest rate, current aggregate spending. (It’d be better to explain it with diagram, thank you!)arrow_forward
- The Keynesian Transmission mechanism will eliminate a recessionary gap if there are not Liquidity Trap or Insensitive Investment function. Explain:a) What it is a liquidity trapb) What it is insensitive investment functionarrow_forwardConsider an economy located near the Indian Ocean where the main industries are agriculture and tourism. Policymakers and economic advisors have determined that consumers' spending behavior is described by the equation: C = 255 + 0.75DI while the domestic investment spending behavior by firms is fixed at $250 billion. Currently, the population is 250 million, the labor force participation rate is 68 percent, and the unemployment rate is 4 percent. The policymakers and economic advisors have also determined that the short run aggregate supply of goods and services in the economy is described by the equation Y = Ypot + 75(P - Pe), while the potential level of real GDP is $2075 billion and the expected price level at full employment, Pe, is 115. Net taxes is described by the equation: T = 120 + 0.2Y while the government spending is fixed at $500 billion. Trading occurs mostly with neighboring economies and currently total imports is $300 billion while total exports is $200 billion.…arrow_forwardAssume that the long-run level of output is Y = 1000, which the economy is also at initially in the short-run. Suppose that the consumption and investment functions are, respectivley, C = 100 + 0.8(Y – Ť), 1- 100— 2000г, that is, MPC is 0.8. Furthermore, the LM (money market equilibrium) curve is M. 200 The government is currently implementing a policy G = 80, Ť = 50, and the central bank (CB) is supplying M = 1000. Expected inflation is T° = 0. Continuing from Part 1, due to the uncertainty surrounding the coronavirus, consumers tighten their belts and consumption function changes to C = 40 + 0.8(Y – T). Focus only on the economy's short-run responses, that is, when the price level P cannot adjust. Derive the new IS curve. It should be written in the form Y = A - Bi, that is, you only need to solve for the values of A = andarrow_forward
- Assume a closed economy described by an IS-LM model of the form:IS Y= c(1-t)Y+Ī+bi+G and LM M=kY-hi. Explain why the government expenditure multiplier of this model is smaller than the one in the simpler Keynesian cross model, and why the increased expenditure is said partially to crowd out private investment.arrow_forwardf and Jarrow_forwardSuppose the consumption function is $800 billion +0.8y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with: a. A $50 billion increase in government purchases b. A $50 billion tax cut c. A $50 increase from income transfers what will the cumulative ad shift be for: d. The increased government spending e. The tat cut f. The increased transfersarrow_forward
- Consider the following functions for consumption and investment: C = 1,000 + (2/3)*(Y – T) and I = 1,200 – 100*r. Furthermore, Y = 8,000, G = 2500, T = 2,000. Compute private, public, and national savings for this economy, and find the equilibrium real interest rate (r). Assume that G declines by 500 units. How will it change your answers in part (a)? What happens to the national savings, given everything else, if the public decides to consume less out of their disposable income (assume that the propensity of consume falls by 10 percent)? Given your answer in part (c), what happens to investment and real interest rate? Answer all four.arrow_forwardSuppose that conditions in the economy are such that the after-tax expected real interest rate is described by the equationRa = a X gWhere a is a number that depends on how people value their consumption in one period compared with another period, and g is the growth rate of the economy. The a equals 1 when people prefer consumption to be balanced, with the same amount of consumption each period; a may be bigger than the one when people prefer consumption today over consumption in the future, with a being larger and larger the more impatient people are:A - Suppose that a = 2, g = 0.02, the inflation rate is expected to be steady at pi = 0.03, and the tax rate is .40. What are the values of the equilibrium nominal interest rate and the before-tax expected real interest rate?B - Beginning with the situation in part a, if the growth rate of the economy increases to .04, what are the new values of the equilibrium nominal interest rate and the before-tax expected real interest rate?C-…arrow_forwardGive me correct answer with calculation and full explanation otherwise i give downvote Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forward
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