Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

2 The equilibrium real interest rate Consider a close economy model of the short run. Assume that the government neither taxes nor spends. Private consumption

image text in transcribed
2 The equilibrium real interest rate Consider a close economy model of the short run. Assume that the government neither taxes nor spends. Private consumption and investments are given by C (t) = acY I (t) = all- by (r(t) - F). You are told that output at time T is Y (T) = 70 and that the long run output is Y = 100. 1. Calculate private savings at T. 2. Calculate private investments at T. 3. Calculate the equilibrium interest rate at T. 4. For concreteness, suppose F = 0.04, ac = 0.6, ay = 0.4, and by = 30 (Note that by * Y = 3000, so this change should not affect your numerical an- swers!) Calculate numerically consumption, investment, and real interest rate at 7 (Note: you must derive three real numbers. To check that you made no mistake, verify that C (T) + I (T) = 70). 5. Next, suppose that, at 7 + 1, the Fed reduces the interest rate to zero. How is Y (7 + 1) going to change in the numerical example? 6. Go to the slide titled "Deriving the IS Curve." Draw the two graphs you see there for the numerical example above. The graphs must be exact, not qualitative. Show in each graph four points corresponding to r = 0 r = 0.02, r = 0.03, and r = 0.05 (you must report the corresponding four numerical values on the horizontal axis). 7. Next, we change the model and assume that some consumption behavior to take into account that some consumers are credit constrained. Specifically, C (t) = aY + > (Y (t)- P) You are told, as before, that Y (T) - 70 and Y = 100. Go over questions 1-2-3 in the new setup. 8. In the case with credit-constrained consumers, for concreteness, suppose now r = 0.04, ac = 0.6, X - 0.5, a - 0.4, and by = 30. Calculate numerically consumption, investment, and real interest rate at T. (Note: you must derive three real numbers. To check that you made no mistake, verify that C (T) + 1 (T) = 70). 9. Redo question 5 in the new model with constrained consumers. Is the reduction in the interest rate more or less effective than in the previous case in increasing demand? Provide an interpretation

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Democratizing The Economics Debate Pluralism And Research Evaluation

Authors: Carlo D'Ippoliti

1st Edition

1000066169, 9781000066166

More Books

Students also viewed these Economics questions

Question

Explain all drawbacks of the application procedure.

Answered: 1 week ago

Question

Do not get married, wait until I come, etc.

Answered: 1 week ago

Question

Do not come to the conclusion too quickly

Answered: 1 week ago

Question

Engage everyone in the dialogue

Answered: 1 week ago