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PLEASE EXPLAIN IN DETAIL:
1) Public Borrowing and Crowding Out Effect.
2)Crowding Out Effect in Monetarist and Keynesian Approaches.
Step by step
Solved in 2 steps
- Explain and illustrate the following: a) Construct one IS-LM model and illustrate using arrows the effects of the following on Y and I when: Government increases government spending, other factors constant. Show the crowding out effect.b) Construct one IS-LM model and illustrate using arrows the effects of the following on Y and I when: Central Bank conducts an open market purchase of government bonds. Describe the transmission mechanism of monetary policy.c. Use the loanable funds market to illustrate graphically how an increase in net capital outflow will affect domestic interest rates and investment. Briefly explain your illustration.Compare monetarist and Keynesian views on the proper conduct of FISCAL POLICY. For both monetarists and Keynesians, explain not only their conclusions concerning fiscal policy but also how those conclusions are related to their respective theories.Consider a hypothetical economy characterized by the following behavioral equations. IS LM C=400-200r+0.2Y Md=Y-1000r I= 240-400r Ms=800 G=200 P=2 a) Show the impact of expansionary monetary policy which is an increase in tax by 50. b) Show the impact of expansionary fiscal policy which is an increase in nominal money supply by 100. c) Using balanced budget multiplier show the impact of an increase in government expenditure and tax by 50.
- Using a four-sector economic analysis tool, present your answer separately about the relevance and impact of each of the following macroeconomic policies: (a) PAKTO ‘88(Easy / Expansionary Money Policy); (b) Increased Real Sector (Expansionary Fiscal)Policy)What is the crowding out effect? Discuss the effectiveness of fiscal policy under the crowding out effect according to the monetarists.The following parameters describe the structure of a hypothetical economy: Autonomous consumption=240 Autonomous investment=1000 Autonomous taxes=100 Autonomous government expenditure=400 Real money supply (M/P)=600 Tax rate=0.25 Marginal propensity to consume=0.8 Interest elasticity of investment=50 Interest elasticity of demand for money=62.5 Income elasticity of demand for money=0.25 a) Determine and explain the relative effectiveness of fiscal and monetary policies. Use your answer to determine equilibrium income and interest rate. b) State the values of the fiscal and monetary policy multipliers if the economy is in a liquidity trap. Explain. c) If government expenditure is increased by 150 units, show how equilibrium interest rate and equilibrium income will change. Can you determine the extent to which investment is crowded out as a result? Explain.
- BQ.1.2Distinguish between monetary and fiscal policy.Which of the following economic schools of thought promote the use of fiscal policies to stimulate spending during periods of recession * Monetarists Keynesians Classical Supply-side economicsA Keynesian economy is described by the following equations. Consumption Cd = 250 + 0.5(Y - T) - 250r Investment Id = 250 - 250r Government purchases G = 300 Government taxes T = 300 Real money demand L = 0.5Y - 500r + πe Money supply M = 3000 Full-employment output Y = 1250 Expected inflation πe = 0 (HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id) Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
- (a) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the central bank conducts an open market sale of government debt, what will be the effect on the price level? Use a diagram, explain your results. (b) Suppose that there is a decrease in the price of housing, which the central bank judges is a temporary asset price decrease. In the New Keynesian model, determine the central bank's optimal response to this asset price increase, using diagrams. (c) Suppose initially that inflation is at the central bank's target and the output gap is zero. Then, government spending goes up. Determine, with the aid of diagrams, how the degree of price stickiness affects the central bank's optimal response and explain your results.The following parameters describe the structure of a hypothetical economy: Autonomous consumption=240 Autonomous investment=1000 Autonomous taxes=100 Autonomous government expenditure=400 Real money supply (M/P)=600 Tax rate=0.25 Marginal propensity to consume=0.8 Interest elasticity of investment=50 Interest elasticity of demand for money=62.5 Income elasticity of demand for money=0.25 a) Determine and explain the relative effectiveness of fiscal and monetary policies and State the values of the fiscal and monetary policy multipliers if the economy is in a liquidity trap. Explain. b) Use your answer in part a) above to determine equilibrium income and interest rate. c) If government expenditure is increased by 150 units, show how equilibrium interest rate and equilibrium income will change. Can you determine the extent to which investment is crowded out as a result? Explain.Which of the following statements is true about joint optimal fiscal and monetary policy? "Despite the need to raise government revenue in non-lump-sum manner:" (a) obtaining economic efficiency along the consumption—leisure margin, is a goal more important in optimal macroeconomic policy, more so than achieving efficiency along the consumption-money margin. (b) obtaining economic efficiency along the consumption—money margin, is a goal more important in optimal macroeconomic policy, more so than achieving efficiency along the consumption-leisure margin. (c) obtaining economic efficiency along the consumption—money margin, is a goal equal as important in optimal macroeconomic policy, as achieving efficiency along the consumption-leisure margin. (d) None of the above.