ECON 2H03 Lecture Notes - Lecture 2: Exchange Rate, Capital Outflow, Autonomous Consumption

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2 Aug 2015

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Consider a small open economy macro model at full-employment with y = 4000. Find the following equilibrium solutions: [each numerical answer is one mark] (a) (b) Increase g from 400 to 500 and increase t from 400 to 500. Keep t = g = 400, but assume that r* decreased to 2. Keep g = t = 400 and keep r* = 4. Assume that autonomous net export increases from 500 to 600 due to imposition of import quota. Assume that both sg and nx are zero at the initial equilibrium. Assume further that sp is not a function of interest rate. Assume that the domestic price = world-price = 1. Fill in the box with any of the following three signs. Nx = s i = 200 (c) (d) (e) Question #2: [3 marks] each numerical answer is one mark. Output per labour function is y = (k/l)0. 2 = k0. 2 (a)

Related Questions

2. Assume that the following characterizes a small open economy: [4 points] Y = 3000, C = 0.6*(Y - T), I = 1000 - 200r, NX = 500 - 500e, r* = 2, G = 1000 ,T = 800.

a. Solve for the equilibrium values of consumption, investment, net exports, net capital outflow, and the real exchange rate.

b. Does this economy have a trade surplus or trade deficit?

c. Is this economy a net borrower or a net lender?

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10.

The long-run aggregate supply curve (LRAS) is Y = Yf, which depends on the amounts of resources and the level of technology innovation. If a country has more resources and better technology, which of the following is true?

		A. The LRAS curve will shift to the right.
		B. The SRAS will shift to the right.
		C. The SRAS will shift to the left.
		D. Only A and B.
		E. Only A and C.

11.

Suppose the wage rates of workers are based on the expected price level. If there is an unexpected increase in AD, it will cause the actual price level to increase. Then workers should raise their expected price level and negotiate a higher wage rate. Then which of the following is most likely to be true when the expected price increases?

		A. The SRAS curve will shift rightward.
		B. The SRAS curve will shift leftward.
		C. The LRAS curve will shift leftward.
		D. Only A and C.
		E. Only B and C.

12.

Suppose the economy is in the long-run equilibrium, i.e., Y = Yf, and there is an unexpected decrease in AD. Assume that Yf is fixed, then which of the following is most likely to be true?

		A. The SRAS curve will shift to the right toward the new long-run equilibrium.
		B. The SRAS curve will shift to the left toward the new long-run equilibrium.
		C. In the new long-run equilibrium, price level will be higher.
		D. Only A and C.
		E. Only B and C.

13.

The short-run (SR) equilibrium is the intersection between AD and SRAS, and long-run (LR) equilibrium is the intersection between AD and LRAS. Every LR equilibrium is a SR equilibrium, but a SR equilibrium is not always the LR equilibrium. If an economy is operating at a SR equilibrium where Y > Yf, which of the following will occur in the process toward the new LR equilibrium when the economy corrects itself?

		A. Price increases.
		B. Real GDP decreases.
		C. Unemployment rate falls.
		D. Only A and B.
		E. Only B and C.

14.

From the Keynesians, Y = C + I + G + NX can be transformed into a theoretical model. In particular, assume that the consumption C = A + mpc (Y-T), where A is a constant, mpc is the marginal propensity to consume, Y is national income and T is income taxes. Suppose in the goods market equilibrium, aggregate expenditure = national income such that the two Y's will be the same from Y = A + mpc (Y-T) + I + G+ NX. . Suppose C = 400 + 0.75(Y â T). G = 100, I = 100, T = 100, and NX = 150, what is the Y in the goods market equilibrium? (All of the variables are in terms of million dollars)

$ million
Please enter a whole number, with no decimal point.

15.

Continue to assume that C = 400 + 0.75 (Y - 100), I = 100, and NX = 150. But the government now increases spending from 100 to 200, how much is the new Y in the goods market equilibrium?

$ million
Please enter a whole number, with no decimal point.

16.

Continue to assume that C = 400 + 0.75 (Y - 100). Then which of the following is true?

		A. The government spending multiplier = 4.
		B. The tax multiplier = 3.
		C. If the government increases spending by $50 million, and at the same time increases taxes by $50 milion to balance the budget, AD will shift to the right by $50 million.
		D. Only A and C.
		E. Only B and C.

17.

Suppose the federal government needs to balance the budget, which means that when the government spending increases, taxes must increase equally. In this case, government spending multiplier is called the balanced-budget multiplier, defined as the increase in real GDP/increase in government spending. By following the example from the previous question, how mcuh is the balanced-budget multiplier?

Please enter a whole number, with no decimal point.

pearseal539

Suppose that the economy of Freedonia obeys the following relationships:

C = 100 + 0.6(Y ï¿½ T)

I^P = 150

G = 250

NX = 120

T = 200

a. Find the numerical equation relating to planned aggregate expenditure (PAE) to output (Y).

b. Calculate short-run equilibrium output, showing all calculations. What is the government budget balance? Does Freedoniaï¿½s government have a budget surplus or a budget deficit?

c. What is the effect of an increase in government purchases from G = 250 to G = 300 on GDP (Y)? Solve for the new level of equilibrium output. What is the multiplier? Show your work.

d. Suppose that the government simultaneously increases net taxes by 50 (that is, continue to assume that government purchases have increased by 50, as in part (c)). Calculate the new level of equilibrium output, showing your work. What is the new government budget balance? How has it changed from (b)? Does Freedoniaï¿½s government have a budget surplus or a budget deficit?

e. Assume that the equilibrium output found in (b) above is the potential output (Y*) of this economy. After the rise in both government purchases (in (c)) and net taxes (in (d)), what is the output gap in percentage terms? Is this an expansionary gap or a recessionary gap? If the natural rate of unemployment is 6%, use Okunï¿½s law to calculate what the actual unemployment rate must be.

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ECON 2H03 Lecture Notes - Lecture 2: Exchange Rate, Capital Outflow, Autonomous Consumption

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