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purpleotter951Lv1

28 Sep 2019

In a closed (no foreign sector), mixed economy with stable prices, if we assume that consumption (C) and investment (I) spending do not depend on the interest rate (r), can we conclude that

a) The interest-related expenditure (IRE) function is vertical?
b) Monetary policy has no effect on real income and output?

Explain your answers.

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Joshua StredderLv10

28 Sep 2019

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Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.

C = 0.8(DI) + 1000	C = Consumption expenditure, DI = Disposable Income
I = 2000	I = Investment expenditure
G = 1000	G = government expenditure
X = 1600	X = spending on exports
M = 1800	M = spending on imports
DI = Y - T	Y = real GDP, T = tax revenues/>
T = 1000
Yp = 12000	Yp = Potential GDP

Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.

	a.	inflationary gap
	b.	recessionary gap
	c.	no output gap
	d.	government budget surplus
	e.	government budget deficit
	f.	balanced government budget
	g.	trade deficit
	h.	trade surplus
	i.	net exports of zero

pucearmadillo585

5. Suppose the U.S. Congress passes a budget which increases individual income

taxes by $120 billion and increases infrastructure spending (airports, roads,

bridges, etc.) by $50 billion. The increase in income taxes is concentrated at the top,

so the tax increase causes personal consumption expenditures to fall by only $30

billion. Use this information to answer the questions below. (20 pts)

a. At constant interest rates (âother things equalâ), what would these policy

changes do to national saving and domestic investment spending?

Change in S =

Change in I =

b. Closed economy analysis: Assuming the U.S. financial system is closed to

international financial flows, draw an S/I diagram to illustrate the effect of

these policy changes on (1) U.S. interest rates and (2) the quantity of domestic

investment spending. Incorporate your numerical answers from part (a) into

your diagram.

c. Open economy analysis: Now assume that the U.S. financial system is open

and that the U.S. is small enough in the global financial system that you can

ignore the effect of these policy changes on global interest rates. Draw an S/I

diagram to illustrate the effect of the policy changes on (1) U.S. net capital

flows and (2) domestic investment spending. When drawing your diagram,

assume that the U.S. would have had net capital inflow without the policy

changes.

All the questions from "Output, Exchange Rates, Macroeconomic Policy, and Open-economy IS-LM-FX Model."

Please answer these questions completely. It is important to me.

Thanks!

6. The TB (i.e., EX â IM) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?

A. Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.

B. Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.

C. Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.

D. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.

11. A shift to the left by the IS curve can be achieved by all of the following EXCEPT a(n):

A. decrease in government spending.

B. increase in taxes.

C. increase in the foreign interest rate.

D. decrease in future expected exchange rate Ee.

13. The LM curve will shift to the left, if there is a(n):

A. increase in money supply.

B. increase in interest rate.

C. decrease in money supply.

D. increase in output.

14. If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

A. It will rise.

B. It will stay the same.

C. It will fall.

D. It is uncertain what will happen.

15. Using the IS-LM-FX framework, if we observe that income and interest rate both rise in the Eurozone, this could be the result of

A. contractionary monetary policy pursued by the European Central Bank.

B. expansionary monetary policy pursued by the Federal Reserve System (U.S. central bank).

C. a stock market crash in the Eurozone.

D. increases in government spending in the Eurozone.

18. Whenever U.S. government spending increases,

A. output will not change at all if the U.S. fixes the exchange rate of dollar against major currencies.

B. output will increase by a larger amount when dollar floats than when dollar pegs to other currencies.

C. output will increase by a smaller amount when dollar floats than when dollar pegs to other currencies.

D. output will not change at all since the U.S. adopts a flexible exchange rate.

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