ECON 401 Lecture 12: LECTURE 12

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silverllama709

13 Oct 2016

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Investment declines during recessions, but we assume them constant. Generally, government purchases increase during a recession, while they should decrease during an expansion. Net exports: nx = exports imports = -. Generally, net exports increase during a recession. Ae = c+i+g+nx = 1,000 + 0. 65 y + 1,500 + 1,500 500 = 3,500 + 0. 65 y. All the possible macroeconomic equilibria must lie on the 45 line (y=ae). The macroeconomic equilibrium is given by the crossing of the ae function. If ae > y, inventories fall and production increases; If ae = y, inventories are unchanged and the economy is in equilibrium; If ae < y, inventories rise and production decreases. Numerically: calculate the aggregate expenditure function: ae = c+i+g+nx, set the macroeconomic equilibrium condition: y=ae, solve for y*: y* = autonomous expenditure * A change in autonomous expenditure (i, g, or nx) a change in y*. The change in y*is determined by the multiplier:

Related Questions

An economy with zero net exports is described below:

C	= 100 + 0.6 (Y 'T)
I ^p	= 70
G	= 120
NX	= 0
T	= 150
The multiplier in this economy is 2.5.

A. Find short-run equilibrium output.

Instruction: Enter your response as an integer value.

Short-run equilibrium output: .

B. Economic recovery abroad increases the demand for the country's exports; as a result, NX rises to 80.

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select)decreases/ increases to ________ .

C. Assume that foreign economies are slowing, reducing the demand for the country's exports so that NX = -80. (A negative value of net exports means that exports are less than imports.)

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select)increases/decreases to ___________ .

D. Which of the following best describes the tendency of recessions and expansions to spread across countries?

1. Lower planned aggregate spending in one nation will reduce the amount of goods it exports abroad, thereby lowering the value of imports for its trading partners, which will reduce its short-term equilibrium output as well.

2. Lower planned aggregate spending abroad means that fewer goods will be exported from a specific nation, leaving more goods available for domestic consumption (C) in that nation, which will increase its short-term equilibrium output.

3. Lower planned aggregate spending abroad will reduce the amount of investment that flows into domestic industries from other countries, thereby reducing domestic short-term equilibrium output.

4. Lower planned aggregate spending in a nation means fewer imports of foreign goods, thereby reducing the short-term equilibrium output of its trading partners through lower net export (NX) values in those nations.

bronzehyena108

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.

cerisewallaby167

Monetary Policy and Inflation: Use our standard Keynesian macroeconomic model:

â¢ Y = E = C + I + NX + G â GDP equals the sum of consumption, investment, net exports, and government purchases
â¢ C = c0 + cy x Y â consumption equals the consumer-confidence term plus the mpc times GDP or income
â¢ I = I0 - Ir x r â business investment spending equals the business animal-spirits term minus the interest sensitivity of investment times the long-run real risky interest rate
â¢ Î¼ = 1/(1 - cy) â the multiplier is the inverse of one minus the mic
â¢ Y = Î¼(c0 + I0 + NX) - (Î¼ Ir) x r + Î¼G â our summing-up equation, telling us how the level of annual GDP depends on the multiplier Î¼, on the private spending flows c0 + I0 + NX, on the
interest-sensitivity parameter Ir, on the interest rate r, and on government purchases G

For this problem, assume a value of the Keynesian multiplier of Î¼ = 2, and with Ir, the sensitivity of investment spending I to the interest rate r, such that Ir = $0.15T. And letâs use the Greek letter Îâcapital deltaâas a shorthand symbol for changes from the previous equilibrium situation.

The Federal Reserve controls the short-term safe interest rate on government securitiesâit can nail that value to whatever it wants by buying and selling bonds for cash. We call this interest rate i. But the interest rate that matters for determining investment spending is the long-term real risky interest rate at which banks lend to companies. We call this interest rate r.

a) Suppose that the interest rate r that matters for investment spending falls by 1.5%-pts:
Îr = -1.5
By how much would you expect investment spending to fall given the parameter values of our model? How large is ÎI?

b) Continue your analysis from (a): given the parameter values of our model and the boosting of investment spending you calculated in (a), by how much would you expect GDP Y to grow?

c) Annual real GDP in the mid-2000s was about $15T. How large is this boost to GDP ÎY you calculated in (b) as a percentage of the then-level of real GDP?

d) On average, a 1% extra boost to GDP is associated with a 1.5% extra decrease in the unemployment rate. By how much extra would you expect the unemployment rate to fall as a
result of the boost to GDP you calculated in (b) and (c)?

e) Suppose that with the interest rate decline the unemployment rate falls from 6% to 4.5%. What would the unemployment rate have been without this interest-rate decline?

f) Suppose that real GDP had been lower for each of three years by the amount you calculated in (b). How much poorer would Americans have been in terms of reduced income over those three years had the interest rate r not fallen?

g) In an America with about 135 million workers, how much is this lost income per worker?

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ECON 401 Lecture 12: LECTURE 12

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