6.Suppose a war causes a sudden, large increase in government spending. a) What happens to both prices and GDP in the short-run Classical Model? Do
September 3, 2020
Questions attached. Questions attached. Files: Unit 3 Template.docx
September 3, 2020

It would be grateful if you could help me solve these questions.

1) Explain and illustrate using the Keynesian model (AE/Y diagram) the effect of the following events on the Aggregate Expenditure (AE) curve and income.

a) The fraction of income spent on imports rises.

b) Business confidence recovers

c) Marginal tax rate falls

2) An economy has the following characteristics. All values are in $millions.

c = 120 + 0.9YD

YD = Y + TR – T

T = 100 + 0.1Y

I = 500, G = 600, TR = 200, X = 700, IM = 300 + 0.2Y

Where C is consumption, YD is disposable income, T is Taxes, TR is transfer payments, I is investment, G is Government expenditure, X is exports and IM is imports.

a) what is the value of the marginal propensity to save?

b) what is the value of the autonomous expenditure multiplier?

c) Calculate the value of the expenditure level of real GDP?

d) Suppose the value of the full employment level of GDP is $500m. State the type of output gap persistent in the economy and calculate its size.

e) Suppose the government aims to stimulate the economy as he result of the output in (d) above. Explain which macroeconomic policy action you would recommend. Give both the direction and the magnitude of your policy action.

3) In the economy of Lendlend, the commercial banks have deposits of $500billion. Their reserves are $50million. All reserves are i deposits with the Central Bank and the commercial banks hold no excess reserves. There is $110billion in Central Bank notes outside the banks, and there are no coins.

a) what is the economy’s monetary base?

b) what is the quantity of money in the economy?

c) calculate the money multiplier.

d) Suppose the Central Bank of Lendlend undertakes an open market purchase of securities so that the monetary base increase by $5 billion. By how much will the quantity of money change?

6) Fisheria is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In 2010, real GDP was %300million, the quantity of money was $60million, and the velocity of circulationof money was $million. In 2011, the price level rose by 20 percent.

a) What was the price level in 2010?

b) What was the real GDP in 2011?

c) What was the velocity of circulation in 2011?

d) What was the quantity of money in 2011?

I would really appreciate for the help….

KM
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