Question

91[30 points) Suppose the US economy is characterized by the following behavioral equations C6 CY Y -Y-T Investment expenditures and Government spending are exogenously en GDP in 2009 was roughly $16,000 billion. As you know GDP fell by approximately 6 percentate points in 2009 If the propensity to consume were 0.8. by how much would government spending have to have Increased to prevent a decrease in output If the propensity to consume were 0.8 by how much would prevent any decrease in output have to have been cute Suppose Congress had chosen to both in overnment spending and taxes by the same amount in 2009. What increase in government spending and taxes would have bee n to prevent the decline in output in 2009 QR[60 points) Consider the following numerical example of the IS-LM model: C-8000.BOYD • BBQ + 0.10Y- 500i G-1000 T.700 a. Derve the 18 relation b. The central banksets an interest rate of 4. How is that decision represented in the equations? a. What is the level of real money supply when the interest rates 45? Use the expression 118-120,000 d.Solve for the equilibrium values of Cand I and verify the value you obtained for Y by adding and o e. Now suppose that the central bank increases the interest rate to Explain what type of policy employed here and the entire process of how the central bank e nese the interested how does this change the LMurveSolve for Y L and C and describe in words the effects of this monetary policy. What is the new equilibrium value of M/P supply Return to the initial situation in which the Interest rates by the central bank Now suppose that government spending decreases to G-800 and einen T-800 g what type of policy and summamathettes of this policy on Y. I And What is the best of this policy on the real money supply Q5 (80 points) Suppose that a person's wealth is $100,000 and that her early income is $120,000 Also suppose that he money demand function is ven by MESY(0.45-) a Derve the demand for bonds. Suppose the interest rate increases by 10 percentage points What is the effect on her demand for bonds! b. How can an increase in the interest rate make bonds more attractive and reduce their pro Explan in detail c. What are the effects of an increase in wonth on her demand for money and her demand for bonds Explain in words d. What are the effects of an increase in income on her demand for money and her demand for bonds Explain in words.

Answer 1

[Q1]

(a)

Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1/0.2 = 5

Decrease in GDP ($ billion) = 16,000 x 4% = 640

Increase in government spending ($ billion) = Decrease in GDP / Spending multiplier = 640/5 = 128

(b)

Tax multiplier = - MPC / (1 - MPC) = - 0.8/0.2 = - 4

Decrease in GDP ($ billion) = 16,000 x 4% = 640

Decrease in tax ($ billion) = Decrease in GDP / Tax multiplier = 640/4 = 160

(c)

Since balanced budget multiplier is 1,

Increase in government spending = Increase in tax = Decrease in GDP = $640 billion

NOTE: As HOMEWORKLIB's Answering Policy, 1st question has been answered.