Question

s. (2 PTS) Assume the following closed economy model: C-350+0,7 (Y 1 300 + 0,04%-30i G=330 ; T . 400 + 0.1Y (MP)"-1,4%. 60i M-4.610;P-2 Where C consumption, I- investment, Y- income, i-interest rate (in percentage ponts, 6, 7, 8 . .), О . government spending; (MP), demand for real balances, Me money supply a) Compute the equilbrium levels for income, the interest rate, consumption investment and the budget balance b) Suppose the goal of the govermnment is to increase the oquilibrium level of income by 5%, using government spending as the only instrument. Compute the new level of G What will be the impact on the variables referred to in section a)? Compute the multiplier of govemment spending and check if there is any evidence of a "crowding out" effect on private investment? ) Altematively suppose that the central bank decides to accommodate completely the fiscal obtained in part b) by keeping the interest rate constant at the initial equilibrium value obtained in part a What should be the money supply change necessary to achieve this goal and what would be the impact on the increase in income and the new equilibrium values for C, L, i, and (T-O d) Suppose now that instead of fully accommodating fiscal policy the monetary authonities decide to eliminate all the expansionary effect of fiscal policy on income How should they instrument that? Why would they do that? What level of the mioney supply would keep the level of income constant?

Answer 1

||6Ότ ).ut y.-6 o ㄴ 、3,05 ),y Y-60レ z 2 1 212 2 0-0 64 4 2 854 2121 21-16 3 3 75 冫15-84

6) ー2, 305 6, 677-0, 038t こ /6,6386 2 8, 6499.16 + Gr