Answer to Question #214046 in Macroeconomics for Kay

Question

Q.1 Consider the following information about a hypothetical economy:

1. Y = A ( ) 0.025K − 0.5N N

2. A=2/3

3. K = 2000

4. N^s=-18+(18/5)w

5. C=200+(2/3)(Y-T)-300r

6. T=-75+(1/4)Y

7. I =100−100r

8. G =100

9. L = 0.5Y − 200i

10. M = 6300

11. 0.10

Now using this information, answer the following: 

(g) If government wants to attain same output change as in part (e) using fiscal policy rather than the 

monetary expansion, by what amount should it change its policy instruments. Analyze all possible options 

the government may exercise. What will be the effect of such policies on all endogenous variables? 

(h) Compare the equilibrium positions in (d) and (g) in one graph indicating all points. 

Answer 1

g) Expansion policy will lead to increased money supply through increased government spending and tax cuts. This is because these factors influence employment and household income.

h)