03 Jun Question 1. Consider the following three-good economy:
Question
1. Consider the following three-good economy:
(a) Using the above table calculate the nominal GDP for 1987.
(b) Using the above table calculate real GDP for 1988 using 1987 as the base year.
(c) Using the above table calculate the percentage increase in Real GDP from 1987 to 1988 using
1987 as the base year.
(d) Using the above table calculate Real GDP in 1987 using 1988 as the base year.
(e) Using the above table calculate the percentage increase in Real GDP from 1987 to 1988 using
1988 as the base year.
2. Assume an economy is represented by the following:
C=100+0.5Yd, T=2000, G=2000, I=200
(a) Calculate the equilibrium level of output. Graph your solution.
(b) If the government spending increases by 100 what is the new equilibrium level of output?
Use the government spending multiplier.
(c) If the government increases taxes by 100 what is the new equilibrium level of output? Use the
tax multiplier.
(d) If the government increases taxes and spending by 100 what is the new equilibrium level of
output?
(e) Calculate the equilibrium level of output in case where taxes depend on income according to
the following: T=-50+0.25Y.
3. (a) Using a graphical analysis show the effects of a contractionary monetary policy on the
equilibrium interest rate, investment and output. Make sure you clearly label all the curves in
your graphs and the initial and final equilibria.
(b) Using a graphical analysis show the effects of a contractionary fiscal policy on the
equilibrium interest rate, investment and output. Make sure you clearly label all the curves in
your graphs and the initial and final equilibria. Is there any crowding-out due to the
contractionary fiscal policy?
4. Use AD and AS curves to discuss the effects of the following events on the equilibrium price
level and equilibrium level of output in the short run. Make sure you clearly label all the curves
in your graphs and the initial and final equilibria.
(a) A government spending increase holding taxes constant with the economy operating near full
capacity.
(b) A decrease in the money supply during a period of high unemployment and excess industrial
capacity.
(c) An increase in the price of oil caused by a war in the Middle East, assuming that the Fed
attempts to keep interest rates constant by accommodating inflation.
(d) An increase in taxes and a cut in government spending supported by a cooperative Fed acting
to keep output from falling.
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