Mony and banking

1. Consider an economy described by the following. C =C+ mpc * (Y - T) [Planned = ] - d * (r+ f) NX = NX - xr G =G Aggregate Demand = AEplanned = C + [ planned + G + NX Monetary policy (MP) curve and takes the form: r = r + An C =3.25 trillion I = 1.3 trillion G = 3.5 trillion T = 3.0 trillion NX = -1.0 trillion f = 1% mpc = 0.75 d= 0.3 (trillion per 1% change) x= 0.1 (trillion per 1% change) 2=1 F =1% a. Derive expressions for the MP curve and AD curve. MP curve: r= AD curve: AD = r + Y b. Find the income expenditure equilibrium. IE equilibrium: Y* = +c. Assume that 1: =1%. What is the real interest rate, equilibrium rate of output, consumption, planned investment, and net exports? Suppose the Fed increases fto T = 2%. Calculate what happens to the real interest rate, equilibrium level of output, consumption, planned investment and net exports. Considering that output, consumption, planned investment, and net exports all decreased in part (c), why might the Fed choose to increase r? (essay type short answer) 2. Aggregate demand curve of an economy is given by AD = 51 - 0.2P, the long-run aggregate supply, LRAS, is 30 and the short-run aggregate supply is given by SRAS = 0.3 P (all output measures are in US$ billions and the price level is given as an index number). a. What is the equilibrium price level? P: b. What is the actual short-run output? SRAS = What is the output gap? Output gap = . What could be the unemployment rate if the natural rate of unemployment is 5%? U: . Assume that the present status of the economy is the result of a supply shock. What could be the original equilibrium (price level and output)? Original equilibrium price level = Original equilibrium output = What will be the new long-run equilibrium without any policy action? Long run equilibrium output = Long run equilibrium price level = What will be the aggregate demand curve when the labor market adjusts? AD= + P