Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 11, Problem 9E
(a)
To determine
Derive the IS curve for the new specification.
(b)
To determine
The economic reason for showing up the
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Read Kiyotaki (1998). Consider the model in section 2 of the paper. Suppose there is no borrowing constraint (i.e., assume is
arbitrarily large). Also assume that a = 1.2, B=0.9, y = 1.05, 8 = 0.1, and n = 4. (The notations of variables and parameters
follow Kiyotaki (1998). Just in case, & denotes the lower case of Delta in the Greek alphabet.)
Reference: Kiyotaki, N. (1998). "Credit and Business Cycles." The Japanese Economic Review, volume 49, issue 1,
(You can obtain a free electronic copy of this article through the university library's website. If you do not know how, please ask
the librarians.)
Answer the following questions.
pages 18-35.
Read Kiyotaki (1998). Consider the model in section 2 of the paper. Suppose there is no borrowing constraint (i.e., assume is
arbitrarily large). Also assume that a = 1.2, 3=0.9, y = 1.05, 8 = 0.1, and n = 4. (The notations of variables and parameters
follow Kiyotaki (1998). Just in case, & denotes the lower case of Delta in the Greek alphabet.)
Reference: Kiyotaki, N. (1998). "Credit and Business Cycles." The Japanese Economic Review, volume 49, issue 1, pages 18-35.
(You can obtain a free electronic copy of this article through the university library's website. If you do not know how, please ask
the librarians.)
Answer the following questions.
1.
What is the equilibrium value of the net interest rate in the steady state? Enter your answer in the blank box below. (For example,
if your answer is 5% in percentage points, then enter 0.05 in the blank box below.)
2.
Compute the ratio of aggregate borrowing (Bt+1/rt) to aggregate output (Yt + Y') in the steady state. (You can assume that…
In this problem you will work with the IS-MP model to calculate a macroeconomic equilibrium using
algebra. The steps are:
1) find the IS equation
2) find the MP equation
3) combine them by substituting the r value from the MP equation into the IS equation
Assume C = 1 + 0.75Y - 0.5T - 25r, I = 19 - 75r, G = 12, T = 14, the average FFR = 0.05, expected
inflation is 3%, the risk premium is 4%, and potential output is 80. What is the output gap in the
macroeconomic equilibrium?
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- Read Kiyotaki (1998). Consider the model in section 2 of the paper. Suppose there is no borrowing constraint (i.e., assume 0 is arbitrarily large). Also assume that a = 1.2, ß = 0.9, y = 1.05, d = 0.1, and n = 4. (The notations of variables and parameters follow Kiyotaki (1998). Just in case, & denotes the lower case of Delta in the Greek alphabet.) Reference: Kivotaki, N. (1998). "Credit and Business Cycles." The Japanese Economic Review, volume 49, issue 1, pages 18-35. 1. What is the equilibrium value of the net interest rate in the steady state? (For example, if your answer is 5% in percentage points, then enter 0.05.) 2. Compute the ratio of aggregate borrowing (Bt+1 /rt) to aggregate output (Yt + Y't) in the steady state. (You can assume that this ratio is constant in each period in the steady state.) Notes: Make sure to clarify the notations of variables and parameters in your proof clearly if they are different from those defined in Kiyotaki (1998).arrow_forwardA 3-sector economic model was constructed and solved, and assuming the parameters take on certain values, the multiplier matrix that is obtained is displayed in Table 1. You are required to answer the following questions by showing your calculation in the space provided. Table 1: Multiplier Matrix Exogenous Variables Endogenous Variables I* G* T* : Output : Consumption Expenditure 1.895 : Tax Revenue Y 2.631 2.631 - 2.105 C 1.895 - 2.316 T 0.263 0.263 0.789 YD : Disposable Income : Government Budget 2.368 2.368 - 2.895 0.263 - 0.737 0.789 Balance : Saving 0.474 0.474 - 0.579 (a) If autonomous investment is reduced by 100, justify its precise impact on disposable income and tax. Answer : AYD = AT = 80, what is the amount of (b) If the govemment has increased its spending by autonomous tax that is required so that the govemment's action in increasing its spending does NOT have an impact on the government's budget balance? Answer : AT* =arrow_forwardSection B Answer the question. Provide the detailed derivation for each answer. Consider the IS-LM model, and suppose that the economy of Mermaid Land can be characterised by the following relations (all units are in millions of domestic currency): C = 200+ 0.25(Y-T) I = 150+ 0.25Y - 1000i d G = 250 T = 200 = 2Y 8000i S = 1600 (a) Derive the equation for the IS curve (b) Derive the equation for the LM curve (c) Solve for equilibrium output (d) Determine the equilibrium interest rate (e) Determine equilibrium levels of consumption and investment (f) Check whether C + G + I=Y (g) Following up on question (e), suppose further that the central bank tries to increase the equilibrium real output by increasing the money supply, such that SI = 1840 Solve for the equilibrium real output and interest rate. (h) Do you think the central bank intervention is effective in increasing the equilibrium real output? Explain your answer briefly.arrow_forward
- (1.4) Consider the following IS-LM model: I Y=C+I+G C=100+0.4(Y-T) I= 150 +0.2Y - 4,000r r = 0.01 with G = 200 and T = 100. (a) Derive the IS curve and draw it in an appropriate diagram. (b) Calculate the equilibrium values of Y, C, I and r. (c) What is the impact of decreasing government spending to G' = 180 in terms of the new equilibrium value Y"? (d) Suppose the central bank decides it wants to counteract the restrictive fiscal policy. What exactly (i.e. we look for graphical and numerical answers) can the central bank do in order to keep equilibrium output at the value obtained for Y in (b)?arrow_forwardThe equation S = I + NCO describes the savings market for an entire national economy engaged in foreign trade. Between the variables I and NCO, which represents the amount of national savings utilized in the domestic economy and in foreign markets? How do you know?arrow_forwardA 3-sector economic model was constructed and solved, and assuming the parameters take on certain values, the multiplier matrix that is obtained is displayed in Table 1. You are required to answer the following questions by showing your calculation in the space provided. Table 1: Multiplier Matrix Exogenous Variables Endogenous Variables I* G* T* : Output : Consumption Expenditure 1.895 Y 2.631 2.631 - 2.105 C 1.895 - 2.316 T Tax Revenue 0.263 0.263 0.789 YD : Disposable Income 2.368 2.368 - 2.895 В : Government Budget 0.263 - 0.737 0.789 Balance S : Saving 0.474 0.474 - 0.579 (a) If autonomous investment is reduced by RM100, justify its precise impact on disposable income and tax. Answer : AYD= AT =arrow_forward
- Let the national-income model be: Y = C + I0 + G C= a+b +b(Y - T) (a > 0, 0 < b < 1) G = gY (0 < g < 1) Consider the national-income model found above. Provide a general equilibrium solution for each endogenous variable (Y, C, G) as a formula of the parameters given. Create a numerical example by selecting and justifying a set of parameters that are close to real estimates for the US economy of $19 trillion GDP.arrow_forwardConsider the specific Macroeconomic model involving: Private sector consumption: C = 2400+0.8(Y-T); Y = GDP, T = Taxes Tax function: T = 125+0.12Y Business sector investment: I =67+0.08r; r = Rate of interest Government spending: G = 788 Exports: X = 192 - 28x; x = Exchange rate Imports: M = 345+0.09Y+2x; Y = GDP, x = Exchange rate Solve this model for the value of the equilibrium GDP (Y*), given that the interest rate is 7%, and exchange rate is $1.18.arrow_forwardConsider the specific Macroeconomic model involving: Private sector consumption: C = 2400+0.8(Y-T); Y = GDP, T = Taxes Tax function: T = 125+0.12Y Business sector investment: I =67+0.08r; r = Rate of interest Government spending: G = 788 Exports: X = 192 - 28x; x = Exchange rate Imports: M = 345+0.09Y+2x; Y = GDP, x = Exchange rate Solve this model for the value of the equilibrium GDP (Y*), given that the interest rate is 7%, and exchange rate is $1.18. Please show all workarrow_forward
- Question 3 a) Sara and Alfred estimated the following model: EDt = B₁ + B₂GDPt - B3EPt + ut (1) where ED₁ = Energy demand in year t, GDP =GDP in year t, and EP = Energy price in year t, the objective of the analysis is to study the effect of Energy demand. They transform (1) and estimate ED/GDP = B₁ (1/GDPt) +B₂ - B3 (EP/GDP) + ut/GDPt (2) The empirical results based on the data for 1986–2015 were as follows: EDt = 40.15 +0.451 GDP + 0.6352 EP Se: (32.11) (0.5432) (0.3245) ED/GDP = 18.22 (1/GDP) +0.789 +0.3512 (EP/GDP) Se: (32.14) (1.2343) (0.6654) R² = 0.91 i) What assumption is made by the authors in the second function and why do they derive the second function? R² = 0.992 ii) Compare the results of the two regressions(at the 5% level). Has the transformation of the original model improved the results, that is, reduced the estimated standard errors? Why or why not? iii) Can you compare the two R² values? Why or why not? b) Explain the 5 reasons for variability of disturbance…arrow_forwardEconomics Consider the following estimated model based on quarterly data of Australian manufacturing exports from January 2015 to December 2019. EXP: = -5.38+0.191Y, + 0.0216FDI_+2.61t t-1 Where EXP, Y and FDI represent manufacturing exports (in thousand dollars), output (in thousand dollars) and foreign direct investment (in thousand dollars), respectively. The following is an excerpt of the actual data. What is the predicted exports in the fourth quarter of 2015? Period Y FDI Third quarter of 2015 57234 344 Fourth quarter of 2015 60031 385 Question 13 options: A11478.41 thousand dollars. B11525.50 thousand dollars. C1151.92 thousand dollars. D11520.17 thousand dollars.arrow_forward………. (1) For this model, ESS = 1,740 and TSS = 2,000 Instructions: 1 The value of RSS is …………. 2 The degrees of freedom associated with RSS are …………. 3 The degrees of freedom associated with ESS are ………… 4 The degrees of freedom associated with TSS are ………… 5 The F-test statistic for testing the significance of the above model is ………… 6 The coefficient of determination () for this model is …………arrow_forward
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