What does the government spending multiplier depend on

Reference no: EM13183126

1. Suppose the initial conditions of the economy are characterized by the following equations. In this problem, we assume that prices are fixed at 1 (the price index is 100 and when we deflate, we use 1.00) so that nominal wealth equals real wealth.

1) C = a0 + a1 (Y-T) + a2 (WSM) + a3 (WRE) + a4 (CC) + a5 (r)

1') C = a0 + a1 (Y-500) + a2 (10,000) + a3 (15,000) + a4 (100) + a5 (2)

2) I = b0 + b1AS + b2CF + b3 (r)

2') I = b0 + b1 (200) + b2 (2400) + b3 (2)

3) G = G

3') G = 700

4) X-M = X-M

4') X-M = -300

Where: a0 = 100, a1 = .90, a2 = .04, a3 = .08, a4 = .8, a5 = -100, b0 = 500, b1 = .5, b2 = .5, b3 = -100

Derive an expression for the consumption function and graph it on your exam sheet. Show all work.

2.Interpret a2 and a3 (i.e., what do they measure) and why are they so important in terms of measuring the impact of the Great Recession on consumption.

3.Why is a3 larger than a2?

4.Derive an expression for the aggregate expenditure curve and graph it on your exam sheet labeling this initial equilibrium output as point A. Also, add this point A to your consumption function. Show all work.

Draw an aggregate demand and an aggregate supply curve in the right hand graph on your exam sheet identifying this initial point as point A.

NOTE: We are holding the price level fixed at 100 in this problem. Also, note that you that you cannot derive an expression for the aggregate demand curve, just draw it with a negative slope going through point A.

5.We now let G rise to 1000 as the Federal Government (fiscal policy) authorities are not happy with the level of GDP. Solve for the new equilibrium output and label as point B on all three of your diagrams. Please be sure to label your diagrams completely and show all work.

6.What is the government spending multiplier in this problem and what does this government spending multiplier depend on?

7.Suppose, that instead of holding prices fixed as we did in this problem, that prices were perfectly flexible, as in a classical world. Discuss, do not show, how your graphs would be different. Also, comment on what would happen to the government multiplier under the assumption of perfectly flexible prices.

Reference no: EM13183126

Questions Cloud

What is the cell potential when the concentration of cu fall : What is the cell potential when the concentration of Cu2+ has fallen to 0.250M? 2. What are the concentrations of Pb2+ and Cu2+ when the cell potential falls to 0.370V?

Calculate the money multiplier in mm : Suppose that due to whatever reason, reserve demand changes and you forecast the reserve demand to now be Rd = 270 - 30 iff. In order to keep the federal funds rate at target, what must the open market desk do? Be specific and show this developmen..

Observations for the natural gas intelligence : Familiarize yourself with one of the industry publications that reports physical, cash prices for natural gas. Inside FERC, Gas Daily and, OPIS do not allow their pubications to be copied unless you have a subscription and receive prior permission..

International relations : Does the 2009 policy decision to expand U.S. troops in Afghanistan enhance the national interests and security of the nations most involved in the outcome in Afghanistan?

What does the government spending multiplier depend on : Suppose, that instead of holding prices fixed as we did in this problem, that prices were perfectly flexible, as in a classical world. Discuss, do not show, how your graphs would be different. Also, comment on what would happen to the government m..

Explain what is the delta hrxn and delta grxn : what is the delta Hrxn, delta Grxn and delta Srxn at 298 K. Ethylbenzene, C6H5--CH2CH3 : delta Ht = -12.5 kJ/mol, delta Gt = 119.7 kJ/mol and S = 255 J/mol*K Styrene, C6H5--CH==CH2 : delta Ht = 103.8 kJ/mol, delta G..

Romantic relations with a subordinate : Do you think its ethical to have a romantic relations with a subordinate? Why/why not? Defend your answer with a real world example.

Diagram of social responsibility : When we refer to responsibility we should examine at the diagram of Social Responsibility of Corporations which relate us to ask the two questions about responsibility.

Which physical distribution system is best suited for supply : One of United's biggest customer has placed a very large, heavy order. Its warehouse is in a location served by all transport modes, and the customer has directed United to ship the order by the mode with the lowest transport costs. In this situat..

User Account

All Pages