8. Consider an economy characterized by the following: C = $3.5 trillion I = $1.

Question

8. Consider an economy characterized by the following: C = $3.5 trillion I = $1.8 trillion G = $2 trillion T = $2 trillion NX = -$1 trillion mpc = .75 d = 10 x=5 =1 r = .01 f =.01 A. Derive mathematical expressions (based on the given parameter values) for the MP curve and the AD curve. B. Assuming that = .02 , solve for the equilibrium levels of consumption, investment demand, and net exports. C. Suppose the Fed increases r to .02. Calculate the effects on the real interest rate, output, and consumption. 9. Supposed the economy is initially as described in question 8. Then, the federal government reduces its autonomous spending G by $200 billion at the same time that the Fed reduces its target for the autonomous component of the real interest rate r to zero. What will be the effects on the positions of the MP curve, the IS curve, and the AD curve? Explain and show.

Explanation / Answer

NX = Net Exports = Exports - Imports

G = Government Spending

T = Taxes or Tax Revenue

MP = Monetary Policy

The monetary policy ( MP) curve indicates the relationship between the real interest rate the central bank sets and the inflation rate. We can write this curve as follows: r = r_ + where r_ is the autonomous component of the real interest rate set by the monetary policy authorities, which is unrelated to the current level of the inflation rate, while is the responsiveness of the real interest rate to the inflation rate.

MP curve = r = 0.1 + 1*

AD or Y =  Y = C(Y - T) + I(r) + G + NX

If you don't understand anything, then comment, I will revert back on the same.

And If you liked the answer then please do review the same. Thanks :)

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.