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3! 2020-21: E63102 Macroeconomics and Public policy CA Assignment Consider the impact of an increase in thriftiness in the Keynesian Cross model. Suppose the consumption function is given by C = C + c(Y - T) where C is autonomous consumption, c is the marginal propensity to consume, 1? is income and T denotes taxes. {i} What happens to the equilibrium level of income when the society becomes thriftier, as represented by a decline in C? [10] (ii) What happens to the equilibrium level of saving and why is this result Is called the paradox of thrift? [15] According to the Permanent Income Hypothesis, how will the paths of borrowing and consumption change in response to: [i] A temporary decrease in income [7] [ii] A permanent decrease in income [8] {iii} How would the answers in [i] and [ii] change if the decrease in income is unanticipated? Comment on the size of the marginal propensity to consume and the size of the multiplier. [10] ii) Explain the economic intuition behind the upward sloping wagesetting curve in the real wage and employment space? [3] {ii} Assume that the economy initially at the WS-PS equilibrium. What happens when there is a sudden upswing in the agregate demand in the economy? [7] (iii) Use the WS-PS model to graphically derive a set of Phillips curves and explain the economic intuition behind the diagram. Provide an explanation of how a situation of deation could occur. What are you assuming about the real interest rate in the deationary scenario? [15] {i} Explain the central banlds loss function and how are the central bank's preferences reected in the loss function? [3] iii) Assuming a = = 1 in the Loss function and the Phillips curve, derive the MR curve graphically and explain the economic intuition behind the process. [7] {iii} Using the 3-equation model, provide a detailed period by period analysis of the adjustment process for the case where the economy is hit by a permanent positive aggregate demand shock. [15]