planned aggregate expenditure

| June 19, 2015

planned aggregate expenditure

An economy is described by the following equations:

Eviéiioiéii

=50+0 0.6-Y T do

lp =1OO G =1OO

NX = 50 T =1OO

Y* =15OO

a. Find a numerical equation relating planned aggregate expenditure to output.

b. By how much would government purchases have to change in order to eliminate the output gap, if any?

c. Use a Keynesian-cross diagram to

briefly explain the effects ofthe change in government purchases in part (b)

cl. By how much would autonomous tax have to change in order to

eliminate output gap, if any?

part B short essay

1. Many European economies were in recession in 2007 and 2008. Use the Keynesian-cross

diagram to describe the situation in these economies. Some economists recommended fiscal stimulus packages as a means of reducing thu
adverse impacts ofthe recession. Meanwhile, other economists suggested that reducing government expenditure (fiscal austerity) offers a
more sustainable solution to the problem. Which advice would you advocate and why?

2. Using the AD-AS model, show how real GDP would change

over time ifthe reserve bank targeted a lower inflation rate and there was no change in fiscal policy. Suppose that real GDP was equal to
potential GDP at the time ofthe change. Explain the role and behavior of interest rate and inflation in the adjustment ofthe economy.

3.

Why would a country want to drop out of a fixed exchange rate system? Why might the country want to join a fixed exchange rate system?
4.

Compare and contrast the effectiveness of monetary policy under the fixed exchange rate regime and the floating exchange rate regime.
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