Question
Please finish 5-7!! Thank you) Suppose that the following information describes all the relevant information about a nation: Household sector consumption: C = 200 +
Please finish 5-7!! Thank you)
Suppose that the following information describes all the relevant information about a nation:
Household sector consumption: C = 200 + 0.90Yd
Business sector desired investment: Id = 700 - 2,000r
Government sector expenditures and Taxes: G = 300 and T = 300
Export sector: EX = 0 (exports) and Import sector IM = 0 (imports)
Money demand: MD = 1,000 - 500r and Money supply: MS = 925
Full employment level of national income is YFull Employment = 6,500.
The required reserve ratio on demand deposits is 40%; all banks in the economy are members of the island's federal reserve system; all money is held as demand deposits; and all banks want zero in excess reserves.
Inflation is assumed to be non-existent.
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1. Determine the equilibrium interest rate, r*.
2. Determine the equilibrium level of national income, Y* and show all equilibrium values in the proper 3-panel diagram.
3. Calculate the multiplier for government spending: give its formula and numerical value.
4. What is the equation for and value of the money multiplier?
5. How could the government use expenditure fiscal policy to achieve full employment national income? Be specific with respect to the values and directions of the policy tool you suggest.
6. Instead of using fiscal policy, how could the Fed use monetary policy via open market operations to achieve full employment national income? Be specific with respect to the value and direction of the Feds open market operations.
7. How would flexible exchange rates in the foreign exchange market impact fiscal and impact monetary policy? No numbers necessary here. And for this assume that exports and imports are no longer assumed to be zero.
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