Homework Answers
1) government expenditure is greater than increase in taxes there will be net increase in aggregate demand. Hence output will increase in the short run.
2) there will be net increase in aggregate demand curve hence it'll shift rightwards. Prices are sticky hence AS will be flat in short run. Output will increase from y-zero to y-one. Diagram is at the end.
3) in the short run prices will not increase only the output will increase due to flat AS curve.
4) in the long run AS will become vertical, and prices will increase leading to fall in demand and ultimately the output level in the economy.
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4. Suppose that we are in a world where short-term prices are sticky, but not fixed....
2. Suppose that we are in a world where short-term prices are sticky, but not fixed....
2. Suppose that we are in a world where short-term prices are sticky, but not fixed. The Fed decides that it wants to increase output. A.) According to the Phillips curve, what is the short-run/long-run tradeoff that the Fed is making in this situation? (quid pro quo, Clarice?) B.) What must the Fed do to the money supply? C.) Describe the graphical changes that take place in the market for real money. D.) In the short-run, what happens to interest...
The government decides to increase expenditure by 1 and increase taxes by .5. In your own...
The government decides to increase expenditure by 1 and increase taxes by .5. In your own words tell me what is happening in with the graphical impact that these policies will have within the AD-AS model. Make sure they represent single adjustment .
Analyze in detail through the income-expenditure model of sticky prices, the impact that increased public spending...
Analyze in detail through the income-expenditure model of sticky prices, the impact that increased public spending and taxes may have on GDP, given government spending and taxes increase by the same amount.
Consider a world in which prices are sticky in the short-run and perfectly flexible in the...
Consider a world in which prices are sticky in the short-run and perfectly flexible in the long-run. APPP may not hold in the short run but does hold in the long-run. The world has two countries, the U.S. and England. Both countries are initially in a long-run equilibrium with fixed money supplies. a) Suppose at time T, the money supply in the United States falls permanently. Draw two diagrams with the money market diagram for the US on the left...
what is the difference between the short run and the long run equilibrium in the AD-AS...
what is the difference between the short run and the long run equilibrium in the AD-AS 6. The economy is in a deep recession. In order to close the output gap, the government is planning on sending a cheque (money) to all households. Explain the short-run and the long run impact of this intervention using the ADAS model. 7. Explain in plain words how the impact of the fiscal policy described above depends on the slope of the AS curve....
Help please I am so confused 1. Assume that nominal wages are sticky and that firms...
Help please I am so confused
1. Assume that nominal wages are sticky and that firms determine the level of employment in the short run. Use an AD/AS diagram to model the goods market, a labor demand/supply diagram to model the labor market, and the loanable funds diagram to model the financial market. Assume that in addition to the real interest, consumption depends on current disposable income and the present value of future disposable income. Speculate what would happen in...
Question 4) Consider an economy with two kinds of firms : Firms with sticky prices have...
Question 4) Consider an economy with two kinds of firms : Firms with sticky prices have ?? Firms with flexible prices ?? A) Derive the following SRAS that we discussed in the class. You have to explain your steps and assumption clearly ( 10 points) ?=?̅ + α (P – EP), Where α = s/[(1-s)a] , and s=0.5 is the fraction of firms with sticky prices; a=0.5 is just a parameter. ?̅= 200 B) How do you interpret the SRAS?...
Question 4) Consider an economy with two kinds of firms : • Firms with sticky prices...
Question 4) Consider an economy with two kinds of firms : • Firms with sticky prices have ps • Firms with flexible prices pf A) Derive the following SRAS that we discussed in the class. You have to explain your steps and assumption clearly ( 10 points) Y=Y +a (P-EP), Where a = s/[(1-s)a), and s=0.5 is the fraction of firms with sticky prices; a=0.5 is just a parameter. Y=200 B) How do you interpret the SRAS? (5 points) C)...
AS/AD: Assume the economy is currently at potential output. Then, a major increase in stock prices...
AS/AD: Assume the economy is currently at potential output. Then, a major increase in stock prices makes consumers feel wealthier, leading them to increase their consumption spending. a) What does it mean for the economy to be at “potential output”? What determines the potential output? b) Use the Aggregate Supply and Demand model to analyze the short-run impact that this new policy will have on real GDP and the price level. This is the “Shock.” c) Assuming no other changes...
Suppose that the marginal propensity to consume if.6 and that there is an increase in government...
Suppose that the marginal propensity to consume if.6 and that there is an increase in government expenditure of 5. a) According to the Keynesian cross model, what is the change in output that results from this policy change? b) Describe the graphical impact that this change will have on the Keynesian cross model c) Why is the change in output different from the change in government expenditure? Explain how this process works intuitively.
2. Suppose that we are in a world where short-term prices are sticky, but not fixed. The Fed decides that it wants to increase output. A.) According to the Phillips curve, what is the short-run/long-run tradeoff that the Fed is making in this situation? (quid pro quo, Clarice?) B.) What must the Fed do to the money supply? C.) Describe the graphical changes that take place in the market for real money. D.) In the short-run, what happens to interest...
what is the difference between the short run and the long run equilibrium in the AD-AS 6. The economy is in a deep recession. In order to close the output gap, the government is planning on sending a cheque (money) to all households. Explain the short-run and the long run impact of this intervention using the ADAS model. 7. Explain in plain words how the impact of the fiscal policy described above depends on the slope of the AS curve....
Help please I am so confused
1. Assume that nominal wages are sticky and that firms determine the level of employment in the short run. Use an AD/AS diagram to model the goods market, a labor demand/supply diagram to model the labor market, and the loanable funds diagram to model the financial market. Assume that in addition to the real interest, consumption depends on current disposable income and the present value of future disposable income. Speculate what would happen in...
Question 4) Consider an economy with two kinds of firms : • Firms with sticky prices have ps • Firms with flexible prices pf A) Derive the following SRAS that we discussed in the class. You have to explain your steps and assumption clearly ( 10 points) Y=Y +a (P-EP), Where a = s/[(1-s)a), and s=0.5 is the fraction of firms with sticky prices; a=0.5 is just a parameter. Y=200 B) How do you interpret the SRAS? (5 points) C)...
Suppose that the marginal propensity to consume if.6 and that there is an increase in government expenditure of 5. a) According to the Keynesian cross model, what is the change in output that results from this policy change? b) Describe the graphical impact that this change will have on the Keynesian cross model c) Why is the change in output different from the change in government expenditure? Explain how this process works intuitively.
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