Consider a closed economy where the goods and money markets are described by the following relationships:C500+ 0.8 (Y-T)I= 500 10rMPa)0.1Y35rG = 800T = 200M = 1000P = 2Where C is planned consumption, I is planned investment spending, T is government tax revenues, G isgovernment purchases, M is the money supply, P is the price level and r is the interest rate.b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point).mpute also the level of consumption and investment spending in equilibrium and check whether the actuallevel of spending matches the equilibrium level of output.e) Suppose that, instead of relying on monetary policy, the government intends to take an active role inrestoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much shouldgovernment spending change by? With the help of graphs, explain very carefully, the impact of this policy onthe economy.f) An economist approaches you and states that, actually, your analysis in e) is incorrect and that the increase ingovernment spending (or, equivalently, a cut in taxes) is unlikely to lead to any increase in output neither inthe short nor in the long-run. How can you explain such a statement from the economist? Explain carefully.g) Suppose that taxes are not exogenous as suggested at the beginning of this task but, rather, endogenous andthat they are proportional to the income earned by households according to the following expression: T = tywhere 0 < t < 1 is the tax rate. In words, describe how this change would affect your IS/LM model and theequilibrium in the economy. Compute again the equilibrium output and interest rate you computed in b) butby assuming that taxes are now proportional to income and that the tax rate is 8% (t = 0.08). Comment onyour findings.

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Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8 (Y-T) I= 500 10r M P a) = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output.

Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8 (Y-T) I= 500 10r M P a) = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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