Consider a macro model that has both a consumption function that depends on lagged income (Like Freidman's permanent income equation) and an investment equation that depends with a lag, on changes in income. Ignore interest - rate effects. In particular assume that the following equations describe the economy
C= 220+ 0.63Yp with Yp =0.5(Y+ Y-1 )
I= 900 + 0.2(Y-1 - Y-2)
A. By algebraic substitution of Can I into the income identity, obtain a single expression for both output Y in terms of output in the previous years (Y-1 and Y-2)
B. Calculate the constant level of output Y that satisfies all the relationships in the model (Hint set Y -1 =Y and Y -2 =Y in the equation from part a and solve for Y using algebra
C. Suppose that y is = to the value you calculated in part b for the past 2 years (Years 1 and 2) Now suppose that government spending increases by $50 billion in year 3 calculate the effect on output in year 3 . Calculate the effect on output in years 4 through 10 . Be sure to use the relationship you derived in part a and substitute the values for Y -1 and Y -2 you calculated in the previous two steps.
D. Plot the values of Y on a diagram with the years on the horizontal axis. Do you notice any cyclical behavior in Y. Explain what is going on ( this model was originally developed by Paul Samuelsson of M.I.T) while a student at Harvard in the 1930's
This solution answers questions about multiplier accelerator interaction.
Q.1. In most developing countries, there are long lines of taxis at airports, and these taxis often wait two or three hours. What does this tell you about the price in that market? Discuss using supply demand analysis. (200 to 300 words)
Q.2. In the mid 1990s, Japan's annual money supply growth rate fell to 1-2 percent from an average annual rate of 10-11 percent in the late 1980s. Explain what effect did this decline have on: (Total 200 to 300 words)
a. Japanese real output?
b. Japanese unemployment?
c. Japanese inflation?
Q.3. Change in Income (∆Y) = $1000 billion
Change in Consumption (∆C) = $900 billion
a) What is the Multiplier?
b) If as a result of decrease in taxes by government, national income goes up immediately by $100 billion what will be the effect after the Multiplier process is complete.
Q.4 Are you in favor of either deficit spending on the part of government or one of a balanced federal budget and budget surpluses? My position is in favor of a balanced federal budget and budget surplus.
Present your argument and discuss the economic situations when your position can be successfully implemented and when it may be doomed to failure. (500 to 750 words)View Full Posting Details