a. Calculate eqm Y in this model and then graph it in the Keynesian-cross diagram. Indicate and provide the name and size of the gap, if any. b. Prove that the appropriate relationship between I and various types of Savings holds at eqm. c. What two different policies could Congress enact? You must calculate the exact changes in the appropriate variables and provide the appropriate name(s) for the(se) policies. Graph each of these policies in the Keynesian-cross diagram. Show what your policies would do, if anything, in the money-market diagram, (in i- M space) cet. par. Indicate the initial disequilibrium and explain what will happen and why.
Economics
If there is an inflationary gap, what should the Fed do? Explain, provide name, and show in i-M space.
- Consider the following macroeconomy, with fixed prices (all amounts are in millions of $):
YFE = 7000
C = 40 + 0.9 YD
I = 500
G = 250
T = 40
a. Calculate eqm Y in this model and then graph it in the Keynesian-cross diagram. Indicate and provide the name and size of the gap, if any.
b. Prove that the appropriate relationship between I and various types of Savings holds at eqm.
c. What two different policies could Congress enact? You must calculate the exact changes in the appropriate variables and provide the appropriate name(s) for the(se) policies. Graph each of these policies in the Keynesian-cross diagram. Show what your policies would do, if anything, in the money-market diagram, (in i- M space) cet. par. Indicate the initial disequilibrium and explain what will happen and why.
d. Go back to the original eqm in part a. Now assume that the stock market booms. Show what would happen in the graph of part a. Explain.
e. Go back to the original eqm in part a. Explain what is meant by the paradox of thrift (POT) and then prove it mathematically -- using the appropriate multiplier -- if the change in co is -25. What are the critical
assumptions that generate this result? What is the “intuition” behind this result?
3. If an economy has an ED for (or shortage of) goods, where is it functioning and what does it mean? Explain by referring to the graph in Z-Y space. What will happen and why?
4. (1 point) Belize’s Parliament just increased its G by $20 m and yet its Govt Budget Deficit (GBD) did not change. Belize only has fixed or lump-sum taxes. Its MPC =0.75. Belize’s Eqm Y would ____
a. not change because its GBD did not change.
b. rise by $80 m.
c. fall by $80 m.
d. rise by $20 m.
e. none of the above
(4 points) Explain your choice by providing appropriate name. What is the name of this type of macro policy?
5. If an economy has an ED for (or shortage of) money, where is it functioning in i-M space? What will happen and why?
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