12. Use the classical model of a closed economy to predict how each of the following shocksshould affect a nation's real aggregate income (Y), national saving (S), investment (1I), andinterest rate (r). Be sure in each case to clearly state your predicted direction of change (up,down, or no change) for all four variables and illustrate your predictions for S, I and r with asupply/demand diagram for the loanable funds market.a. The size of the labor force shrinks (L decreases)b. Technological innovation increases total factor productivity (A increases)c. The government cuts taxes (T decreases)d. Autonomous investment (io) decreases.

Classical closed model is known as a basic model of employment and output determination. It is…

Answered: 12. Use the classical model of a closed…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Consider the following simple Keynesian model, (i) Rewrite the model into matrix form with Y, C and I as endogenous variables and Go and i as exogenous variables. (The coefficient matrix must be a 3 by 3 matrix.) Y=C+I+Go C = 200+ 0.8Y I= 1000-2000 (ii) Compute the equilibria Y*, C* and I* as functions of Go and i using Cramer's rule. 8Y* (iii) Find and di ƏY* ƏGo (iv) Give an economic interpretation of national income? ƏY* " ƏGo what should the government do if it wants to raise
2. Suppose that a representative household is part of a two-period economy, with a commodity and a credit market. He holds no initial assets (bonds or money) and no final assets, by the end of the second period. Assume that, for some exogenous reason, the price level decreases at the beginning of period one, before consumption and labor effort decisions are made. This drop is expected to last forever. a) Do you expect this change to yield any real effect? More exactly, are real aggregate output demand (through consumption) or supply (through labor effort) affected? Explain why or why not. b) Imagine now that this household leaves a bequest to the next generation. As a result, a decision is made to hold a fixed real value of bonds (b2/P) by the end of the second period. These will be paid to the children of the household. Under these conditions, will there be any impact from the price level change over the individual consumption and labor effort choices of the representative household…
3. Assume that production function is Cobb- Douglas type, namely Yi = zika i N 1-a i (1) where i = 0, 1 indicates the two periods of the model. Derive the formula for the investment demand given the model parameters and other endogenous variables, like real wage and employment. Calculate al ad . How does the depreciation rate influence investment? Explain
(2) Imagine that you operate an economic forecasting firm. Your stock in trade is that you know the true model of the economy where you work. Assume the following is a description of this economy. Y = C+1+G+ NX. ... C = a + bY. ... 1 = k + gY- hR... G = Go.... NX = n- mY- sR.... ..... (Income identity) (Consumption) .... (Investment) (Government) (Net export) .......... .....*** Y is aggregate real output and R is interest rate. (a)Briefly explain why the investment function is directly related to aggregate real output and inversely related to interest rate. (b)Suppose for this economy the values of the parameters and independent variables are as follows, a = 250, b = 0.55, k = 150, g 0.10, h = 500, Go = 350, n 50, m = 0.05, s 500, R= 5% find the value of aggregate real output Y and the multiplier. %3D %3D %3D %3D %3D %3D %3D %3D (c) Suppose the government financed its budget deficit by borrowing additional 100 from the credit market, by how much will this new spending change the…
1. Consider the following classical macroeconomic model. Y = C(Y –T) + I(r -x)+G 0 0,1, 0 (4) N = N° - NS Y = F(N,K) F, > 0 (5) Y, C, T, ! , G, r, 1 M, P N, are respectively output, consumption, taxes, investment, government consumption, the nominal interest rate, the expected inflation rate, the money supply the price level, Y,P,N,r,W and labor. The endogenous variables are 1 is predetermined, and the policy variables G, and M, and the capital stock, K are exogenous. а) Interpret the equations. b) What are the effects of an adverse supply shock, described by a fall in the capital stock on the price level, the real wage, employment, and output. c) Why do fiscal policy and monetary policy not affect output or employment? d) What are the effects of a fiscal and a monetary expansion on the price level and interest rate?
3. Most global markets have been reporting severe contractions, which mainly responding to the COVID-19 pandemic. The situation is worsened by the decrease in people’s confidence in the government as policymakers, spreading a wave of pessimism towards the future prospect of the economy. Explain how such wave of pessimism, ceteris paribus, may lead to short-term economic fluctuations, which will eventually work to push the economy back towards its long-run equilibrium. Use relevant diagrams to support your answer.
1 Fully develop (mathematically and graphically) the Keynesian Cross (Expenditures=Output) model. Be explicit regarding what variables are endogenous and what variables are exogenous.
10. Consider a one-period economy which experiences the destruction of some of the nation's capital stock (say through a hurricane is de- stroyed). How should this effect equilibrium, consumption, output and labor supply? Now, let's say the government tries to offset some of the declines in capital on output and hours worked by increasing govern- ment spending. What is the likely outcome of this policy intervention in terms of consumption?
QUESTION 2 Consider the closed-economy market-clearing model. Assume that the marginal propensity to consume is 0.8. Tax revenue decreases by $5 billion, while output and government spending remain the same (a) Calculate the dollar change in consumption. (b) Calculate the dollar change in national saving. (c) Does the equilibrium real interest rate increase, decrease, or stay the same? n toolhar nress ALT+F10 (PC) or ALT+FN+F10 (Mac).
I have to analyze, using the IS-LM model, the macroeconomiceffects of an increase in savings in the short term and its implications for long-term growth. Specifically, I have to suppose that households (consumers) lose confidence and start saving more for any level of disposable income. Can you plase answer the following question (using graphs too): In terms of total savings and, therefore, of potential long-term growth, is a flat LM curve or a positive sloping LM curve better?
10. Which of the following are reasons why the short-run Aggregate Supply curve shown in the right-hand diagrams may be vertical? a) The economy at this level of real GDP would be operating beyond the full-employmetn level. b) Inflationary expectations have set-in so, the owners of resources are acting on these inflationary expectations and insisting on higher resource prices in anticipation of future products price inflation. c) Short-run Aggregate Suply in the Classical model is always constant. d) All the above e) Only (a) and (b) are true. f) None of the above.
(3)Suppose the model for an economy is given by Y = C +1 + G + NX C = a + bYd Yd = (Y-t Y) I = lo G = Go NX = g-mY where lo = 900, Go = 1,200 and the constants take the following values: a = 220. b = 0.9 t = 0.3, g = 500, m = 0.1 (a)For this economy, find the value of equilibrium real output, tax revenue, disposable income (Yd) personal consumption expenditure and net export. (b)Suppose that investment increases by 100, determine the change in real output associated with this Increase in investment spending.

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