ECON 315 Lecture Notes - Lecture 6: Economic History, Basel Iii, Walt Whitman Rostow

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olivepanda926

23 Jun 2017

School

University of Maryland

Department

Economics

Course

ECON 315

Professor

Saltiel

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Document Summary

Gdp = consumption + investment + government spending + exports (nx) Y= c + i + g + nx. Yt = ct + it (or) yt = ct + st. How delta percent of capital depreciates from year to year. Kt+1 = (1- delta)kt + st (1) Total savings = % of income saved. No matter how rich our country is, it will always have the same amount of capital. K/y will always be the same across time. K/y= kt/yt = (kt+1)/ (yt +1) (3) R ( yt+1) = r yt - delta r yt + st. R (yt+1)) - r yt = st - delta r yt (4. 1) ( r (yt+1) - r yt ) / yt = ( st -delta r yt ) /yt. Growth rate depends on 3 factors: savings percentage, r (fixed capital-to-output ratio) and rate of depreciation. Countries can only grow if : they increase the savings rate, s.

Related Questions

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

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

Y = E = C + I + NX + G: GDP equals the sum of consumption, investment, net exports, and government purchases.

C = c0 + cy x Y: consumption equals the consumer-confidence term plus the mpc times GDP or income

I = I0 - Ir x r: Business investment spending equals the business animal-spirits term minus the interest sensitivity of investment times the long-run real risky interest rate.

Î¼ = 1/(1 - cy): The multiplier is the inverse of one minus the mic.

Y = Î¼(c0 + I0 + NX) - (Î¼ Ir) x r + Î¼G: 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

a) Suppose that the short-term safe nominal interest rate on government securities the Federal Reserve controls, i = 5%, the expected inflation rate = 2.5%, the term premium = -1%, and the risk premium = 3%. What is the real risky interest rate r at which banks lend to companies the rate that matters for investment spending?

b) Suppose that the expected inflation rate stays the same, but a financial crisis causes the risk premium to spike from 3% to 8%. What happens to the long-term risky real interest rate r if the term premium and the short-term safe interest rate on government securities 'i' remain constant?

c) Suppose that for each one-percentage-point the Federal Reserve reduces the interest rate it controls 'i', the term premium moves by 1/2 percentage point in the opposite direction. What happens to the long-term risky real interest rate r if the risk premium spikes from 3% to 8% and the Federal Reserve responds by lowering the short-term safe nominal interest rate 'i' it controls by as much as possible?

d) Suppose that the interest sensitivity of investment 'Ir' is $0.2T that a 1% point change in r moves annual investment spending I by $0.2T in the opposite direction. By how much downward pressure would the shift from the situation in (a) to the situation in (c) have put on investment spending?

e) With a multiplier Î¼ of 3, and holding other things constant, how much downward pressure on annual GDP Y would have been generated by the downward pressure on investment spending in (d)?

f) Suppose that the Federal Reserve had kept the 'i' it controls the same. How much downward pressure would the financial crisis and its interest rate spike have put on annual GDP Y?

g) Suppose the Federal Reserve took active, aggressive, and successful policy steps to convince people that it would keep the interest rate 'i' it controlled at zero for a long time into the future, and so had nailed the term premium to the value of 0. What would your answer to (f) have
been?

jadecoyote283

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 315 Lecture Notes - Lecture 6: Economic History, Basel Iii, Walt Whitman Rostow

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