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The value of the government purchase multiplier

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1. a. Suppose velocity is stable. What would the Federal Reserve need to know in order to keep output at its natural level following a supply shock?

b. Assume that velocity is unstable and unpredictable. How would this complicate the Federal Reserve's ability to stabilize the economy following a supply shock.

c. Suppose OPEC suddenly collapsed and oil prices plummeted. Indicate what would happen to the short run aggregate supply and aggregate demand curves, output, and the aggregate price level in the short run

2.  Consider the following model of the economy:

C = 170 + 0.6(Y - T)

I = 250

G = 300

T = 200

a. What is the value of the marginal propensity to consume?

b. Calculate the equilibrium level of GDP

c. What is the value of the government purchase multiplier?

d. Use your answer to Part d to calculate the amount by which government purchases of goods and services would have to rise in order to increase the equilibrium level of GDP by 50

Reference no: EM13149128

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