Reference no: EM133295021

Assignment:

1. What is stagflation?

2. Assume that GDP is $6,000, personal disposable income is $5,100, and the government budget deficit is $200. Consumption is $3,800, and the trade deficit is $100.

a) How large is saving (S)?

b) how large is investment (I)?

c) How large is government spending (G)?

3. Look at the role taxes play in determining equilibrium income. Suppose we have an economy described by the following functions: ?? = 50 + 0.8???? ??¯= 70 ??¯= 200 ????¯¯¯¯ = 100 ?? = 0.20

a) Calculate the equilibrium level of income and the multiplier in this model.

b) Calculate the budget surplus, ????.

c) Suppose that ?? increases to 0.25. What is the new equilibrium income? the new multiplier?

d) Calculate the change in the budget surplus. Would you expect the change in the surplus to be more or less if ?? = 0.9 rather than 0.8?

e) Can you explain why the multiplier is 1 when ?? = 1?

4. Using the IS-LM model, graph and explain how the monetary authorities could avoid a crowding out effect caused by fiscal expansion.

5. Using the AS-AD model (graph and explanation), suppose that the government increases spending from G to G′ while simultaneously raising taxes in such a way that, at the initial level of output, the budget remains balanced.

a) Show the effect of this change on the aggregate demand schedule.

b) How does this affect output and the price level in the Keynesian case?

c) How does this affect output and the price level in the classical case?

6. Suppose short-run output exceeds full potential output by 3 percent.

a) According to Okun's law, what is the effect on unemployment?

b) Assuming that inflationary expectations are constant, what is the effect on wages.