# quot;Chapter 3. Problem 2 2.

“Chapter 3. Problem 2  2. Consider an economy is which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investment, government purchases of goods and services, and net exports: Ca = 1,500 – 10r c = 0.6 T = 1,800 Ip = 2,400 – 50r G = 2,000 NX = -200 (a)Compute the value of the marginal propensity to save. (b)Compute the amount of autonomous planned spending, Ap, given that the interest rate equals 5. (c)Compute the equilibrium level of income, given that the interest rate equals 5. (d)Suppose that autonomous consumption changes by 4 percent of any change in household wealth and that the decline in the housing market in 2006-07 and drop in the stock market in the summer of 2007 reduces household wealth by \$750 billion. Compute the decrease in autonomous consumption that results form the decline in household wealth. (e)Calculate the new amount of autonomous planned spending, Ap, and the new equilibrium level of income, given that the interest rate equals 5. (f)Using your answers to parts c-e, compute the value of the multiplier. (g)Fiscal and monetary policymakers can respond to the decline in household wealth by taking actions that restore income to its initital equilibrium level. Fiscal policymakers can increase government spending or cut taxes or do both. Monetary policymakers can reduce interest rates. Given the values of the multiplier, the tax multiplier, and the balanced-budget multiplier, compute by how much: Government spending must be increased in order to restore the initial equilibrium level of income, given no change in taxes or the interest rate. Taxes must be cut in order to restore the initial equilibrium level of income, given no change in government spending or the interest rate. Government spending and taxes must be increased in order to restore the initial equilibrium level of income, given no change in the government budget balance or the interest rate. The interest rate must be reduced in order to restore the initial equilibrium level of income, given no change in government spending or taxes. Chapter 4. Problems 1 and 2 1.You are given the following equation for the real demand for money: (M/P)d = .25Y – 50 r (a)Compute the demand for money for each of the following interest rates when income is equal to \$11,940, \$12,000, \$12,120, and \$12,1280: R= 4.4 r= 4.7 r= 5.0 r= 5.3 r= 5.6 r= 6.2 (b)Given your answers to part a, graph the demand for money curves when income equals \$11,940 and income equals \$12,180. (c)Suppose the real money supply, Ms/ P, equals \$2,750. Given your answers to part a, find the interest rates and levels of real income at which the money market is in equilibrium. Use these combinations of the interest rate and real income to graph the LM curve, given that the real money supply equals \$2,750. Label this curve LM0. (d)Suppose the real money supply increase to \$2,780. Given your answers to part a, find the new combinations to graph the new LM curve, given that the real money supply now equals \$2,780. Label this curve LM1. (e)Suppose the real money supply decreases to \$2,720. Given your answers to part a, find the new combinations of the interest rates and real income at which the money market is in equilibrium. Use these combinations to graph the new LM curve, given that the real money supply now equals \$2,720. Label this curve LM2. 2.You are given the following information for the commodity market, in which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes: Ca = 2,180 – 20r c = 0.6 Ip = 2,400 – 60r G = 2,000 NX = -300 T = 1,800 The money market is described in problem 1. (a)Compute the values of the marginal propensity to save, s, and the multiplier, k. (b)Derive the equation for the autonomous planned spending, Ap. (c)Derive the equation for the IS curve, Y = kAp, and graph the IS curve when the interest rate equals 4.7, 5.0, 5.3, 5.6, 5.9. (d)Using your answers to part c of problem q and part c of this problem, explain what interest rate and at which level of real income the commodity and money markets are both in equilibrium. (e)In the first half of 2003, the Fed changed monetary policy because unemployment was too high and it feared any additional decline in the rate of inflation would result in deflation. Suppose that natural real GDP equals \$12,060 and the equilibrium in part c is similar to economic conditions in the first half of 2003. Using your answers to parts d or e of problem 1 and part c of this problem, explain how the Fed should change the real money supply in order to move real income to natural real GDP in an effort to reduce unemployment and avoid further reduction in the inflation rate. “ 