Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The following macroeconomic data are from a fictitious country's economy in 2014. Dollar values are measured in billions of 2014 dollars, and population figures are
The following macroeconomic data are from a fictitious country's economy in 2014. Dollar values are measured in billions of 2014 dollars, and population figures are measured in millions. Assume the country's economy is in short-run equilibrium. Consumption $210 Population 100 Investment $100 Labor Force 80 Exports $45 Employed 72 Imports $50 Government Spending $60 Expected Inflation Rate 6% Taxes $20 Potential Real Output $400 (a) Calculate the actual rate of unemployment. Show your work. (b) Is the economy facing a recessionary gap, an inflationary gap, or neither? Explain using numbers. (c) Based on your answer to part (b), how will the economy adjust in the long run in the absence of any government policy action? Explain. (d) Now assume the economy is in long-run equilibrium. (i) Assume net exports increase by $20 billion and the marginal propensity to consume is 0.5. Calculate the maximum possible change in real output. Show your work. (ii) Based on the change in net exports, what will happen to the equilibrium price level in the short run? Explain. (e) Based on the change in real output identified in part (d) (i), is the actual rate of unemployment greater than, less than, or equal to the natural rate of unemployment in the short run? Explain. (f) Based on loanable funds market analysis, how will an increase in government deficit spending affect the equilibrium real interest rate? Explain. (9) Based solely on the change in the equilibrium real interest rate identified in part (f), what will be the effect on each of the following? (i) The amount of borrowing by firms to purchase plant and equipment. Explain. (ii) The long-run aggregate supply curve. Explain
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started