Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 9, Problem 4AP
To determine
To describe: The algebraic expression for the general equilibrium values of employment, the real wage, output, the real interest rate and the price level is to be derived.
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This problem asks you to analyze the IS-LM model algebraically. Suppose consumption
is a linear function of disposable income:
C(YT) = a + b(YT)
where a > 0 and 0 0 and d > 0.
(a) Solve for Y as a function of r, the exogenous variables G and T, and the model's
parameters a, b, c, and d.
(b) How does the slope of the IS curve depend on the parameter d, the interest rate
sensitivity of investment? Refer to your answer to part (a), and explain the intu-
ition.
(c) Which will cause a bigger horizontal shift in the IS curve, a $100 tax cut or a $100
increase in government spending? Refer to your answer to part (a), and explain
the intuition.
0
$75 150 225
Investment ($)
Price Level
AS
Q₁
Real GDP
Investment
Demand
$50 100 150
Investment ($)
AD, (/=$50)
Z
AD, (/=$150)
-AD, (/=$100)
Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of
investment spending associated with each curve. All figures are in billions. The economy is at point Y on the investment
demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment
level of real GDP?
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After staying virtually flat for about a year and a half, the average lending rate of banks has started to show signs of decline in April after the Bank of Ghana reduced the monetary policy rate the month before. The Summary of Economic and Financial Data (May 2020) published by the Bank of Ghana has shown that average lending rate has finally moved out of its comfort zone to a step downward. Prior to recording 22.38 percent in April, the average lending rate has since the past 17 months (December 2018) not come below 23%.How would banks benefit when interest rates decrease?
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- Real interest rate (percent) C) an increase in corporate taxes D) a decrease in tax credits for savings Supply D₁ L₁ 4 Loanable funds (dollars per year) 11) Refer to Figure above. A shift from D₂ to Di will result from which of the following? A) an increase in expected future profits B) an increase in net exports A) an increase in the equilibrium real interest rate. B) a decrease in the equilibrium real interest rate. D₂ 12) All else equal, an increase in net exports accompanied by a decrease in expected future profits would definitely result in C) an increase in the equilibrium level of saving and investment. D) a decrease in the equilibrium level of saving and investment.arrow_forwardDiscuss how decisions by consumers (householders) and firms can shift the AD curve left or right. Holding AS constant, explain how this will tend to change the equilibrium price level and real GDP produced in the economy. Lastly, how could the government play a role in helping the economy recover from a recession in this model? (11.4)arrow_forwardYour Policy Brief team has modelled the effects of an investment in Research & Development (R&D) that leads to the invention of a new production method which makes more efficient use of renewable energy sources. This new production method can be disseminated throughout the economy, bringing down production costs for businesses, and enabling the economy to make more productive use of existing resources. This brings an expansion in the economy’s productive capacity. Illustrate the predicted effects of this innovation using an AD-AS diagram. Provide bullet points to explain what is happening in your diagram. As with all of your diagrams, be sure to indicate the original and new equilibrium points, and what happens to output and price level. To conclude your explanation, explain what the link between innovation and economic prosperity and wellbeing is.arrow_forward
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