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Suppose that the price level is fixed in the short run so that the economy doesn’t reach general equilibrium immediately after a change in the economy. For each of the following changes, what are the short-run effects on the real interest rate and output? Assume that, when the economy is in disequilibrium, only the labor market is out of equilibrium; assume also that for a short period firms are willing to produce enough output to meet the aggregate demand for output. a. A decrease in the expected rate of inflation. b. An increase in consumer optimism increases desired consumption at each level of income and the real interest rate. c. A temporary increase in government purchases. d. An increase in lump-sum taxes, with no change in government purchases (consider both the case in which Ricardian equivalence holds and the case in which it doesn’t). e. A scientific breakthrough that increases the expected future MPK.
using appropriate diagram, show the concepts of ceiling price and floor price . 10marks
What is expansionary monetary policy
A hypothetical economy is represented by the following parameters-
Labour force (L) = 40 million, Capital stock (K) = 700 million, saving rate (S) = 0.35, rate of depreciation (δ)
=0.05, rate of population growth (n) =0.015, partial (α) = 0.45 and total factor productivity (A) is constant.
Calculate effective output (y) and effective stock of actual capital (k) (3+3)
b) Find out steady-state stock of effective capital (k*) (3.5)
c) Show graphically the impact of a fall in the rate of depreciation using Solow’s diagram.
The U.S. dollar exchange rate increased from $0.96 Canadian in June 2011 to $1.03 Canadian in June 2012, and it decreased from 81 Japanese yen in June 2011 to 78 Japanese yen in June 2012.
What was the value of the Canadian dollar in terms of U.S. dollars in June 2011 and June 2012?
1. Compare the effects of an autonomous increase in government spending in the IS-LM curve version of the Keynesian model with the effect of the same shift within the classical model. (4)
Identify a newspaper article that illustrates a market failure in your assigned
Caribbean country. Ensure that you provide a screenshot of the article in your
submission.
NOTE: Only the following market failures should be examined: public good,
asymmetric information, positive or negative externality.
(i) Provide a brief summary of the main points in the article. (Maximum 30 words)
(2 marks)
(ii)Identify the type of market failure being discussed in the article and discuss why
market failure occurs in this scenario. (3 marks)
(iii) Suggest a relevant government policy that would yield the efficient outcome and
carefully explain the process through which the implementation of the
government policy will lead to the optimal outcome. (Maximum 30 words)
(4 marks)
(iv) How will the imposition of the chosen government policy impact consumer
surplus, producer surplus and total surplus in this scenario? (Maximum 30 words
What is the difference between a movement along the aggregate demand (AD) curve and a shift of the aggregate demand curve? Explain in terms of what causes a movement and what causes a shift.
Consider a two-period model economy populated with consumers that have the same income and the same preferences. There is also a government whose objective is to spend 60 in period 0 and 150 in period 1. This government can issue bonds in period 0. Each bond pays interest rate r. Consumers can also issue bonds at the same interest rate .Consumers’ optimal decisions, given r, imply that aggregate consumption C*0 is equal to2/3(Y0− T0) +2/3(Y1− T1)/(1 + r). Suppose Y0= 300 and that income is expected to remain at this level in period 1
a)define the competitive equilibrium of this economy
b) Show that, together, the three conditions given in a) imply that the equilibrium value of r is given by
r = (2(Y1-G1)/Y0-G0)-1.
c) Calculate Aggregate Demand in the current period.
Consider a two-period economy populated with consumers that have the same income and the same preferences. G = 60, G' = 150. The government can borrow in the current period by issuing bonds. Each bond pays the real interest rate r. Consumers can also borrow at the same real interest rate r. Consumers’ optimal decisions, given r, imply that AG C* = 2/3 (Y− T) + 2/3 (Y' - T')/(1+r). Suppose that Y=Y' = 300.
Economic activity falls by 18 units in the current period. This recession is expected to continue and national income is expected to fall by 20 units in the future period. Consumers believe these expectations.
A) Calculate AD given the current period and recession.
B) Use a graph to explain why the equilibrium interest rate falls from 0.25 to 0.20
C) Explain why the government should not increase its expenditure G
D) Would a tax cut in the current period, that is decrease in T, be a better choice than an increase in G to fight this recession? Explain, why or why not.
