1. Answer both parts (a) and (b). (a) Explain the Ricardian Equivalence Theorem using a two period model of consumption. Explain in detail. (b) Is the Ricardian Equivalence Theorem likely to hold in practice? Explain in detail.
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A: Given MPC = 3 / 4 MPC = 0.75
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- 6. When households opt to increase savings; consumption decreases from Co = 240 + 0.9YD to C = 140 + 0.9YD. Assume AS = 2p, I = 100, R = 100 + 0.1y, G = 50 and NX = 200 – 0.01Y – 0.1p. а. Provide two labelled diagrams with supporting calculations showing AS/AD and NS/NAF to illustrate how prices and real GDP and savings respond to this change. Show equilibrium y0, y1 and y2. Ignore long run considerations. b. Explain whether or not this example exhibits a Paradox of Thrift.5 3. permanent Income Hypothesis a) suppose that beta=.9 and R= 2222 (that is ~22%). For an individual who acts according to the PIH, will their consumption next period be higher than current consumption or lower? b) What is the main crucial difference between the Keynesian Consumption function and the consumption function derived from the PIH (or Lifetime Income Hypothesis)? c) If Present Value of future income stream is 500,000 and a person has a beta of.8, how much will their consumption go up today if only today's income increases by 1000? How much will their consumption increase (approximately) if their income goes up by 1000 in all periods?ADVANCED ANALYSIS Assume that the consumption schedule for a private closed economy is such that consumption is: C = 100 + 0.75Y Assume further that planned investment Ig is independent of the level of real GDP and constant at Ig = 50. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig Instructions: Enter your answers as whole numbers.a. Calculate the equilibrium level of income or real GDP for this economy. Equilibrium GDP (Y) = $ . b. What happens to equilibrium GDP if Ig changes to 60? Equilibrium GDP (Y) = $ . What does this outcome reveal about the size of the spending multiplier? Spending multiplier = .
- (1)The following macroeconomic model describes the economy of Sunderland. 1. Y= C +I + G + NX 2. C = 220 + 0.63 Y 3. 1 = 1000- 2000R 4. G = Go 5. NX = 525-0.10Y-50OR 6. M (0.1583Y-1000R)P (a)ls it a fair characterization to refer to equation #2 as a "simple" consumption function? Explain. (b)Derive the expression for equilibrium real output, Y, for this economy. Note: In your final expression for Y, restrict coefficient values to three decimal points. (c) Suppose government spending is 1200 , money supply by the Central Bank is 900 and the price level is 1, find the value of GDP (Y) and equilibrium interest rate (R) for Sunderland. Income Identity Consumption function Investment function Government Expenditure Net export function Money market equilibrium (2)The questions in this section are related to the macroeconomic model of Sunderland. (a)The expression you are asked to derive in question #1b can be considered an aggregate demand curve. Do you agree? Explain your answer. (b)Sketch…Given the following informations; Consumption(C) 800+0.9Y, Where Y-Income Investment (I) =8000-800r, where r=interest rate Money Supply (Ms) =28500 Demand for Money (Md) =0.75Y-1500r and if the autonomous Investment decreased then %3D income decreased and interest rate increased. income increased and interest rate decreased. O income decreased and interest rate decreased income increased and interest rate increased1. Identify the formula of consumption function & saving function C = _______________ S = _______________ 2. If the consumption function is C = 250 + 0.57Y and investment, I = RM450, calculate the equilibrium income in this two- sector economy. 3. Given, C = 700 + 0.7Yd, compute MPS 4. What is macroeconomic 5. Define principles of microeconomics
- Let: C = consumption I = investment spending G = government spending Tx = tax revenue Yd= after-tax income MS = money supply MD = money demand r = interest rateAssume for a given closed economy:(i) Consumers spend $200 billion plus 80% of after-tax income, orC=200+0.8 Yd(ii) Investment demand varies inversely with the interest rate, such thatI= 500-2000r(iii) Currently government spending and taxes are both $250 billion, orG=250 and Tx=250,(iv) The total money demand or liquidity preference schedule for this economy is an inversefunction of the rate of interest and is given by the equationMD=850-1000r(v) The required reserve ratio for banks in this economy is 20%. No bank holds excessreserves, and everybody keeps their money in the bank. The total of reserves in the banks is$150 billion.Answer the following questions given the information above.d) The central bank wants national income to be $3000 billion. What must investment befor the equilibrium level of national income to be $3000…1. Complete the accompanying table with disposable income (DI) and consumption (C) schedules for a private, closed economy. All figures are in billions of dollars. DI Consumption Saving АРС APS MPC MPS 8. 40 40 80 72 120 104 160 136 200 168 240 200 (a) Refer to the above data. If plotted on a graph, the slope of the consumption schedule would be: (b) The break-even level of income is ($ ) where saving equals ( $ :). Households dissave ( $ ). Dissaving occurs at the lowest levels of income as households spend ( more, less ) than they receive in disposable income. This dissaving could occur with households liquidating (selling for cash) their assets or borrowing money. As income rises we see that savings ( increases, decreases ) by a greater and greater amount. (c) If consumption increases by $10 billion at each level of disposable income, the average propensity to consume (APC) will ( change, unchange) and/but the marginal propensity to consume (MPC)will ( change, not change). (d) (APC,…2.2(a)How Permanent income hypothesis and life cycle hypothesis explain the differences between the long-run APC and the short-run APC?(b)Use an appropriate diagram based explain why the MEC-curve might overstate the additional investment that could be generated in an economy with a one-percent reduction in the rate of interest.
- C:/Users/iM/Desktop/S-slaiöl-üläubi- A A قراءة بصوت عال AACSB: Analytic Skills Refer to the information provided in Figure 9.3 below to answer the questions that follow. AE-C+1+G 500 300 45 500 Aggregate output, Y (billions of dollars) Figure 9.3 billion. 25) Refer to Figure 9.3. At equilibrium, autonomous planned expenditures equal $_ D) 300 A) 200 B) 100 C) 500 Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 26) Refer to Figure 9.3. The expenditure multiplier is A) 4. B) 5. C) 2.5. D) 2. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Efects Skill: Analytic AACSB: Analytic Skills 27) Refer to Figure 9.3. If autonomous planned expenditure increases by $20 billion, equilibrium aggregate output A) decreases; 360 to S billion. B) increases; 550 C) increases; 600 D) increases; 640 Answer: B Diff ? Planned ag (Saop jo suogngQuestion Two a. Explain the difference between a binding and non-binding borrowing constraints and thetwo consumption functions that result.b. From the Intertemporal Choice Model, many theories (non-Keynesian theories ofConsumption) came into being. Using graphical and mathematical expressions, compareand contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesis18. According to the income and consumption schedules shown above, the marginal propensity to consume is(A) 1.33(B) 0.90(C) 0.80(D) 0.75(E) decreasing as real disposable income How come MPC equals 0.75?