Please only answer 3.3 thank you Real Sector Y = Z Output equals aggregate deman
ID: 1241269 • Letter: P
Question
Please only answer 3.3 thank you
Real Sector Y = Z Output equals aggregate demand, an equilibrium condition Z = C + I + G Definition of aggregate demand C = c0+ c1YD Consumption fn, c1 is the marginal propensity to consume YD =Y-T + Tr Definition of disposable income T = t1Y Tax function; t1 is marginal tax rate. Tr = TR0 Transfer payments; TR0 is lump sum transfers. I = b0 + b1Y -b2i Investment function G = GO0 Government spending on goods and services, exogenous Asset Sector Md/P = Ms/P Equilibrium condition Ms/P = M0/P Real money supply Md/P = mu0 + Y -hi Real money demand Consider the Aggregate Demand-Aggregate Supply framework. Suppose government spending is reduced when we are not in a liquidity trap (and do not end up in a liquidity trap), and the Fed does NOT target the interest rate. You can assume for simplicity expected inflation is always zero. Show what happens in an IS-LM and AD-AS graph in the period the government spending reduction occurs. Show what happens over time to output, the price level, and the interest rate. Show what the IS-LM and AD-AS graphs look like if initially, the economy is not in a liquidity trap, but interest rates are very close to zero, and output is below potential GDP/full employment. Then show what happens if potential GDP shifts out a lot because entrepreneurs develop new products due to tax rate reductions and deregulation.Explanation / Answer
The AD curve will be plotted on output vs income.The curve has downward sloping.There are so many reasons like this. 1)Mundell-Fleming's exchange-rate effect. And IS-LM curve also explains about aggregate demand.The IS curve is equilibrium in the market for goods and services and it is downward slopping. And the LM curve describes equilibrium in the money market and it is upward slopping on the interest and income axes. Income is on X-axis and Interest rate is on Y-axis. Thank you.