Provide answers inclusive of all The workings for the two problems. The questions are attached in the document below, they have to be correct and accurate.
Problem Set 2
September 16, 2020
Due: 9-23
Blanchard Ch. 3: 9
- Suppose the economy is described by:
C = 17500 + 1
2
(Y − T)
I = 17500 + 1
4
Y
G = 5000
T = 5000
(a) Basic quantities:
i. Find equilibrium Y, C, I.
ii. What is the multiplier?
iii. What is the level of the government budget (T − G)? Is the
budget balanced, in de cit, or in surplus?
iv. Suppose there is a nancial crisis, and autonomous investment
(b0) falls by 1200. What are the new equilibrium quantities of
Y, C, and I
(b) Fiscal Policy Choices: Suppose Congress is considering the use of
scal policy to address the crisis, and that you are an economist
whose job is to inform policymakers of their menu of options.
i. The policymakers are rst considering using government spending alone to counter-act the crisis. They ask you: By how much
would G have to increase to restore output to the pre-crisis level?
At this new level of G, and what would happen to the goverment
budget?
ii. Next, they consider using tax cuts alone as stimulus to counteract the crisis. By what amount would taxes need to fall to restore
output to the pre-crisis level. At this new level of taxes, what
would be the state of the government budget?
iii. Which scal policy option considered above would leave the government with a larger budget de cit? What is the intuition behind this?
1
iv. Suppose that policymakers wanted to increase G to restore output to its pre-crisis level, but wanted to simultaneously increase
T to prevent a budget de cit. By how much would G and T need
to increase to restore output to the pre-crisis level? - Causal Investment
We have seen that one way of characterizing goods market equilibrium is
that Investment = Savings. However, this equilibrium condition does not
tell us whether more savings causes more investment, or whether more
investment causes more savings. While most people have a good intution
as to how having a greater amount of savings can lead to a larger amount
of investment, it is often di cult for people to understand how having
more investment could lead to a larger amount of savings. We will explore
that in this problem.
For this problem, assume there is no government (i.e. G = T = 0), and
the economy is characterized by the following equations:
C = 15000 + 1
2
Y
I = 15000 + 1
4
Y
(a) Using the I = S equilibrium condition, nd equilibrium Y, C, I and
S.
(b) Create a graph of the I = S equilibrium, with I, S on the vertical
axis, and Y on the horizontal axis. Make sure to label all intercepts,
slopes, and equilibrium quantities.
(c) Suppose b0 increases from 15, 000 to 16, 000.
i. What are the new equilibrium values of Y, C, I and S?
ii. Draw this on your graph, and make sure to label the new intercept, and equilibrium quantities.
iii. What is the intuition as to why savings has increased when investment increased? How is this possible?