The following question is about microeconomics..

PAGE 1 -- Consumer Utility Assume both Good X1 and Good X2 cost 52, and Person] has a budget of $24 for the two goods. Assume, given the shape of hisfher indifference curves, Person J most prefers to consume equal units of Goods A and B. 1a. (i) Draw an indifference curve for Person J for goods X1 and X2. In your diagram place Good X2 on the yaxis and Good X1 on the xaxis, and label the indifference curve l1. (ii) Insert a budget line curve into the diagram that reflects the optimal preference of Person] with his/her cui'rent budget. On each axis, indicate the amount of X1 and X2 that Person] is consuming. 1b. (i) Return to la and draw two additional indifference curvesone below the original indifference curve and one above the original indifference curve. Assume the price of Good X1 falls to $1. Make changes to your diagram in (a) above as a result of this price change. 1c. At the new price for good X1, how many units of X1 does consumer] consume? 1d. At the new price for good X1, how many units of X2 does consumer] consume? 1e. Depict the individual demand curve of Person] for Good X1 for quantities demanded at prices 51 and 52. Show numerical values for price and quantity. explain what happens tn shortrun output in each of the fellcwing cases. 1. EL. increases by 5 percentage paints. 2. g decreases by 1 percentage point. 3. The real interest rate rises from 2.5% tn 5%. :1. Potential entpnt increases by 10%. 19. Suppose the parameters of the IS curve are a, = 0, b = 0.5, r = 3% and the real interest rate is initially R = 3%. (a) Is the economy in its long-term equilibrium? Explain. (b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant? (c) What happens to the short-run equilibrium if a falls 3 percent, holding everything else constant? (d) What occurs if the marginal product of capital rises to 5%? What would cause this to happen?19. Suppose the parameters of the IS curve are a, = 0, b = 0.5, r = 3% and the real interest rate is initially R = 3%. (a) Is the economy in its long-term equilibrium? Explain. (b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant? (c) What happens to the short-run equilibrium if a falls 3 percent, holding everything else constant? (d) What occurs if the marginal product of capital rises to 5%? What would cause this to happen?Why does the Short Run Aggregate Supply curve slope upwards while in the Long-Run Aggregate Supply is perfectly inelastic. 2. Assume we start in LR equilibrium. Suppose we see the consumer confidence index rise. Use our Aggregate Supply/Aggregate Demand model to discuss the following. A. Would this event affect AD, SRAS, or LRAS? How and Why? Show this on an AD/AS graph B. Would this create an output gap? If so, what kind? Label this on your graph. C. How could the market self-correct to get back into LR equilibrium? Show this on your graph. 3. Consider a new deposit to the US banking system of $1000. Suppose that all banks have a desired reserve ratio of 20%. The following table shows how deposits, reserves, and loans enable the creation of money. Assume there is no currency drain and that banks do not hold on to excess reserves. a. Complete the table below. Round Change in Change in Change in Loans Deposits Reserves First $1000 $200 $800 Second Third Fourth Fifth b. After 5 rounds, what is the total change in deposits as a result of the single NEW deposit? C. What is the eventual total change in deposits? d. What is the eventual change in the money supply? What is the eventual change in reserves? In loans?A. Find the equilibrium level of income. B. Now suppose the government decides that this level of income is too low, and it wants to increase it by 1,000. It could do this by increasing government purchases. By how much does it need to increase government purchases to raise income by 1,000? C. Now suppose the government decides that instead of increasing government purchases, it will cut taxes instead, by the same amount. Will this cut in taxes be sufficient to increase income by 1,000? If not, what should it be? (Note: Parts (B) and (C) can be answered by using multipliers. Also, when a consumption function is written as C = a + b(Y - T), the marginal propensity to consume is given by the coefficient, b.) 5. Consider an economy where the money market has the money demand function (M/P) = 2,000 - 200r Where r is the interest rate in percent. (I.e., if the interest rate is 8 percent, then r = 8.) A. Suppose that the money supply M is 2,000 and the price level P is 2. Find the equilibrium value of the interest rate. B. Now suppose the central bank thinks this interest rate is too low, and it might stimulate aggregate demand too much, which would eventually lead to inflation. So, to raise the interest rate, it reduces the money supply from 2,000 to 1,200. What is the equilibrium value of the interest rate now? (Note: The money demand function and the price level don't change. Only M does.) C. Now suppose that several months pass, and the central bank sees new data, and it concludes the policy raised the interest rate too high, which may lead to a recession. It concludes it must lower the interest rate to 4 percent. What money supply should it set? (1.e., find the value of M that makes (M/P)* = M/P, such that r = 4.)1. For the production function Y = K951 5, MPL = 0.5K"'L>. Since a profit-maximizing firm hires labor until MPL - W/P, the labor demand function in this case is L" = 0.25K/(W/P] A. Suppose the economy has 1,000 units of capital and a labor force of 1,000 workers. What is the equilibrium value of the real wage, W/P? And in this equilibrium, what are employment, output and the total amount earned by workers? (You should find that the real wage is %% unit of output.) B. Now suppose the government passes a law requiring firms to pay workers a real wage of 1 unit of output. What are employment, output and total labor earnings now? (Refer to Figure 6-3 on p. 183. When there is a rigid real wage above the equilibrium real wage, employment is demand-determined.} 2. Suppose that the economy is in long-run equilibrium when a catastrophic storm destroys a large quantity of crops and reduces food production. A. Use the AD-LRAS-SRAS model to graphically illustrate the short-run and long-run responses to the shock. B. Now explain how the economy moves from the old equilibrium to the new one. 3. A. Suppose that the AD curve is given by Y = 4(M/P), the LRAS curve is parallel to the y-axis, centered at Y = 4,000 and the SRAS curve is parallel to the x-axis, at P = 1.0. Also assume that the money supply is M = 1,000. What are the long-run values of P and Y? B. Suppose now that the AD curve sifts to Y = 2(M/P). What are the short-run values of P and Y? Given that the AD curve stays at this new location, what are the values of P and Y after the economy is again in a long-run equilibrium? C. Finally, draw an AD-LRAS-SRAS diagram that depicts both the situation before, and the situation after, the demand shock. (L.e., put both AD curves on the same AD-LRAS-SRAS diagram. The AD curves are nonlinear, but for this diagram, you can draw them as straight lines.) 4. Suppose that the economy is characterized by these equations: Y = C+1+G C = 250 + 0.8(Y - T) I = 1,000 G = 1,000 T = 1,000