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Consider a consumer who consumes only two goods, x and y. His utility over these two goods is given by U(x,y) = xy. The budget constraint of the consumer is given by 3x + 9y = 216, where 3 is the price of good x, 9 is the price of good y and 216 is the total income of the consumer.
(a) Find the optimal quantities of good x and y that the consumer is going to consume. Show the solution in a graph. What level of utility is the consumer going to achieve with this bundle?
(b) Now assume that the price of good x increases to 6. Find the new optimal consumption bundle and show it in a graph
Explain the reasoning for existent of financial institutions.
Consider a consumer whose utility function is given as: U (x, y) = xy, where x and y denote the quantities of goods x and y consumed. The budget constraint faced by the consumer is: 4x + 8y = 120, where 4 is the price of good x, 8 is the price of good y and 120 is the income of the consumer.
a) Find the optimal quantities for x and y consumed by the consumer. Show your solution diagrammatically
b)Following on the answer in a, now assume that the price of good x increases to 8. Find the new quantities consumed by the consumer
How is interest rate determined by classical, Keynesian and hicksian school of thought
In Figure 11-10( Dornbusch Fischer ) the economy can move to full employment by an expansion in either money or the full employment deficit . Which policy leads to E1 and which to E2 ? How would you expect the choice to be made ? Who would most strongly favor moving to E1 ? Versus E2? What policy would correspond to "balanced growth"?
Consider two alternative programs for contraction.One is the removal of an investment subsidy;the other is a rise in income tax rates. Use the IS-LM model and the investment schedule ,as shown in Figure 11-9 ( Dornbusch Fischer ) , to discuss the impact of these alternative policies on income , interest rates ,and investment.
Suppose the government cuts income taxes.Show in the IS-LM model the impact of the tax cut under two assumptions:a)The government keeps interest rates constant through an accomodating monetary policy.b) The money stock remains unchanged .Explain the difference in results.
“We can have the GDP path we want equally well with a tight fiscal policy and an easier monetary policy , or the reverse , within fairly broad limits . The real basis for choice lies in many subsidiary targets , besides real GDP and inflation, that are differently affected by fiscal and monetary policies.” What are some of the subsidiary targets referred to in the quote ? How would they be affected by alternate policy combinations?
Which of the following factors will increase the size of the multiplier?
Two separate capacity constraints are discussed in this chapter: (1) the actual physical capacity of existing plants and equipment, shown as the vertical portion of the short-run AS curve, and (2) potential GDP, leading to a vertical long-run AS curve. Explain the difference between the two. Which is greater, full-capacity GDP or potential GDP? Why?
