Consider the following macroeconomic model:
Y = C + I + G + NX
C = 100 + 0.8 YD
I = 300 - 1000 i
NX = 195 - 0.1 Y - 100 (E.R.)
E.R. = 0.75 + 5 i
M = ( 0.8 Y - 2000 i ) P
G = 200
t = 0.25
M = 800
P = 1.0
Assume that prices adjust according to the following price adjustment equation
inflation rate = 0.5(Y-1 - Y*)/Y*, where Y* is potential GDP.
(a) Increase government spending by $50 billion starting from potential GDP which is $1200 billion. Calculate the 4-year paths of inflation, the domestic general price level, national output, the interest rate, and the real exchange rate. [FOR FULL CREDIT YOU MUST SHOW ALL CALCULATIONS].
(b) Calculate the full government spending policy multiplier. [FOR FULL CREDIT YOU MUST SHOW ALL CALCULATIONS].
(c) Calculate the monetary policy multiplier. [FOR FULL CREDIT YOU MUST SHOW ALL CALCULATIONS].
(d) Calculate the general price level after the economy fully adjusts to the AD shock caused by the increase in government spending, [FOR FULL CREDIT YOU MUST SHOW ALL CALCULATIONS].
(e) Using the goods and services market, the money market, the IS/LM model, and the AS/AD model diagrams, describe the increase in government spending event, including the full adjusment process.
(f) Increase the nominal money supply by $50 billion starting from potential GDP which is $1200 billion. Calculate the 4-year paths of inflation, the domestic general price level, national output, the interest rate, and the real exchange rate. [FOR FULL CREDIT YOU MUST SHOW ALL CALCULATIONS].
(g) Using the goods and services market, the money market, the IS/LM model, and the AS/AD model diagrams, describe the increase in the nominal money supply event, including the full adjusment process.
(h) FULLY ANALYZE AND COMPARE THE TWO FULL ADJUSTMENT PATHS.