Question 1: where C0 = autonomous consumption and c1 = propensity to consume

By how much does Y change when G increases by one?

a) Delta Y =

By how much does Y change when T increases by one?

b) Delta Y = (Properly format expression using the tools in the palette.)

Question 2: Calculating the risk premium on bonds,

The text presents a formula where,

(1+i) = (1-p) (1+i+x) + p(0)

Where,

i is the nominal interest rate on a riskless bond

x is the risk premium.

P is the probability of default (bankruptcy)

a) If the probability of bankruptcy is zero, the rate of interest on the risky bond is?

b) When the nominal interest rate for a risky borrower is 10% and the nominal policy rate of interest is 4%, the probability of bankruptcy is?

c) When the probability of bankruptcy is 10% and the nominal policy rate of interest is 5%, the nominal interest rate for a risky borrower is?

d) When the probability of bankruptcy is 15% and the nominal policy rate of interest is 5%, the nominal interest rate for a risky borrower is?

Question 3:

a) If investors become less risk averse and/or less concerned about the health of the financial system, consumers and firms are likely to see ........... in the rate they pay to obtained funds.

b) the central bank wants to maintain the economy's output at its initial level, the change cited above will require ___ monetary policy.

Question 4:

a) Investment will change by _____ the change in b0.

b) National saving should _____ when b0 increases.

Question 5: Suppose that the economy is characterized by the following behavioral equations:

C = 170 + 0.90YD

I = 110

G = 140

T = 150

a) Equilibrium GDP (Y) =

b) Disposable income (Yd) =

c) Consumption Spending (C) =

Question 6: a) Now suppose that autonomous spending decreases.

1.) Using the line drawing tool, draw a new demand function. Label your line 'ZZ" 2.) Using the point drawing tool, identify the new equilibrium point. Label your point 'A"

Carefully follow the instructions above and only draw the required objects.

b) If the propensity to consume is 0.6 and the decrease in autonomous spending is $100 billion, equilibrium output will fall by .................

Question 7: Nominal interest rates differ from real interest rates in that nominal interest rates are expressed in terms of _______.

Question 8: In this problem, we examine how this automatic response of taxes can help reduce the impact of changes in autonomous spending on output.

Consider the following behavioral equations:

C= Co + C1 YD

T = t0 + t1 Y

YD = Y - T

G and I are both constant. Assume that t1 is between 0 and 1. Note Co is autonomous consumption, c1 is the propensity to consume, and t0 is the part of taxes not dependent on income.

a) Solve for equilibrium output. (Use I instead of I in equation.)

Y = ...... (Properly format your expression using the tools in the palette. Hover over tools to see keyboard shortcuts. E.g ., a subscript can be created with the_ character.)

b) What is the spending multiplier?

c) The economy responds ...............to changes in autonomous spending when t1 is 0 than when t1 is positive.

Question 9: a) If in year t nominal GDP is $8,200 and real GDP is $6,800, the GDP deflator is? (Round response to two decimal places.)

b) If the GDP deflator in the prior year 1.15, the inflation rate for year t is? (Round response to one decimal place.)

Question 10: Consider the money market to better understand the horizontal LM curve in this chapter.

The money market relation (equation 5.3) is

M/P = YL(i)

a) On the right - hand side of this equation is the ......

b) On the left - hand side of this equation is the............

c) Go back to Figure 4-3 in the previous chapter ->

The function L(i) is represented in that figure as a ........... line

Question 11: The figure on the right plots the change in the unemployment rate on the vertical axis against the output growth rate on the horizontal axis for a hypothetical economy. The line drawn in the graph gives the best fit to the scatterplot.

a) According to this figure, lower output growth leads to ........ in the unemployment rate.

b) If the slope of the line in the graph is - 0.3, we can say that, on average, a decrease in the growth rate of 1% increases the unemployment rate by roughly ............ (Enter response as a positive real number.)

c) According to the figure, the unemployment rate will remain constant if the output growth rate is about ............ (Round response to one decimal place.)

Question 12: The figure on the right shows the graphical determination of equilibrium in the market for goods.

Using the figure, answer the questions below

a) The line that intercepts the 45-degree line is the ........ function.

b) If the propensity to consume is 0+5* then the spending multiplier will equal.......

Question 13: The figure on the right shows the determination of the interest rate in the financial market.

a) The money demand curve is downward sloping to indicate that the amount of money demanded is ...........the interest rate.

b) Suppose there is a decrease in the economy's level of nominal income.

1. Using the 3-point curved line drawing tool, show the effect of this event in the accompanying figure. Label your new curve appropriately.

2. Using the point drawing tool, identify the new equilibrium point. Label your point 'A". Carefully follow the instructions above and only draw the required objects.

Question 14: Output per hour worked is referred to as _____ and is a key economic variable.

Question 15: Show the effects of this policy on output in the accompanying figure.

1.) Using either the 3-point curved line drawing tool or the line drawing tool, draw a new curve. Label your curve appropriately.

2.) Using the point drawing tool, identify the new equilibrium point. Label your point 'A". Carefully follow the instructions above and only draw the required objects.