Within the Keynesian model with both a flexible price and flexible money wage, illustrate graphically and explain the effect of a decline in expectations. Include in your answer the effects of this policy shift on real output, the price level, employment, the money wage, and the interest rate. Explain what this question has to do with the typical Keynesian view of what causes recessions.

Within the Keynesian model with both a flexible price and flexible money wage, illustrate graphically and explain the effect of a decline in expectations. Include in your answer the effects of this policy shift on real output, the price level, employment, the money wage, and the interest rate. Explain what this question has to do with the typical Keynesian view of what causes recessions.

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter17: The Philips Curve And Expetactions Theory

Section: Chapter Questions

Problem 9SQP

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Which of the following describes the use of Keynesian macroeconomic policy to resolve an inflationary gap problem in the economy? a) Unemployment, resulting from the short-run product markets equilibrium being below Long-run Aggregate Supply (LRAS), causes wages to decline, which increases short-run Aggregate Supply (AS), until long-run equilibrium is attained at full employment level of income and a lower price level. b) Government spending is increased, increasing Aggregate Demand (AD) to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level. c) In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the short-run Aggregate Supply (AS) to decrease to the point where long-run equilibrium is restored. d) Taxes are increased reducing Aggregate Demand (AD) to a level consistent with full employment.
A Keynesian economy is described by the following equations. Consumption Cd = 250 + 0.5(Y - T) - 250r Investment Id = 250 - 250r Government purchases G = 300 Government taxes T = 300 Real money demand L = 0.5Y - 500r + πe Money supply M = 3000 Full-employment output Y = 1250 Expected inflation πe = 0 (HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id) Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
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According to the Keynesian model, demand shocks affect output in the short run because: nominal wages are sticky. employment can be adjusted quickly. real wages do not change as inflation changes. None of the above.
Consider the extended AD-AS model with the augmented Phillips curve. Full-employment output is y = 300 and the aggregate demand takes the form AD = 20+ 2(M/P). The short-run supply is y=ỹ+2(P- pe) and M = 500. Starting from the long-run equilibrium, the quantity of money is increased to M = 800. The increase is unanticipated. This means that the expected price pe is the price in the long-run equilibrium before the increase in M. What will be the equilibrium price and output in the first period in which the increase in M arises? (Hint: the root finding formula for quadratic equation ax2+ bx + c= o is -b+ /b2 – 4ac 2a O A. P=5.63, Y=304.12 O B. P=2.60, Y=340.42 O C. P=10, Y=350 O D. P=1.45, Y=503.34
Substantial economic slumps come from falling aggregate demand-the sum of overall consumption, investment and government spending within the economy. As Keynesian economist, discuss the key policies (and or interventions) to stimulate the economic fallout of the 2008 Great Financial Crisis (GFC).
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