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##### l i) C = 1500 + mpc (Y - tY)

**Description**

solution

**Question**

Consider the following model;i) C = 1500 + mpc (Y - tY);ii) I = 800;iii) G = 500;iv) X - M = 500 - mpi (Y);where;t = the (flat) tax rate;mpc = the marginal propensity to consume;mpi = the marginal propensity to import;suppose mpc =.80, t =.25, mpi =.2;Given the information above, solve for the equilibrium output;A) Y* = 3300;B) Y* = 5500;C) Y* = 1500;D) Y* = 1800;2.;We know that the formula for the (government) spending multiplier is 1/(1-mpc(1-t) + mpi). The value of;the government spending multiplier in this problem is: Round to 2 decimal places.;A) 1.33;B) 2.55;C) 3.33;D) 1.67;3.;When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by;100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100.;In round two, this is an increase in income of 100 to consumers. We will trace out exactly where this;100 increase in income goes in the second round. Recall, there are three leakages to address (via taxes;imports and savings).;Given that t=.25, we know that.25 of every dollar increase in gross income is a leakage due to taxes. Since;the increase in income is $100, we know the leakage due to taxes is;A) $25;B) $100;C) $75;D) 25 cents;4.;Given that mpi=.2, we know that.2 of every dollar increase in gross income is a leakage due to imports.;Since the increase in income is $100, we know the leakage due to imports is;A) $100;B) $80;C) $20;D) 20 cents;5.;Given that the MPC=.8, we know that.2 of every dollar increase in gross income is saved. Since the;increase in income is $100, we know the leakage due to savings is;A) $100;B) $80;C) $20;D) 20 cents;6.;To find out how much consumption increases we need to take the increase in income ($100) and subtract;out the leakages. So take the $100 and subtract your answers from #3, #4 and #5 above. When income;increases by $100, consumption increases by;A) $100;B) $25;C) $20;D) $35;7.;What would happen to the multiplier if the mpi rises to.25? Round to 2 decimal places.;A) the new multiplier is 1.54;B) the new multiplier is 1.89;C) the new multiplier is.65;D) the new multiplier is.37;8.;What would happen to the size of the leakage if the mpi rises to.25?;A) this would reduce the size of the leakage;B) this would increase the size of the leakage;9.;In this question, we are going dig deeper into the Taylor Rule and it variants (modifications).;Federal Reserve data from October 1, 2011;Potential GDP growth y* = 1.7%;Actual GDP Growth yA = 2.0%;Inflation PCE (actual inflation) A = 2.6%;Effective Federal funds Rate =.07%;As Taylor assumed, we assume the equilibrium real rate of interest r* = 2% and the optimal inflation;rate, the target inflation rate * is also equal to 2%.;The standard (original) Taylor rule formula;iff TR = r* + A + 0.5[ A - *] + 0.5 [ yA - y*];Using the 'standard' Taylor rule from above and using the data provided, what is the federal funds rate;implied by the 'standard' Taylor Rule?;A) 2.04%;B) 1.56%;C) 3.33%;D) 5.05%;10.;According to the actual federal funds rate (use the Effective Federal Funds Rate provided above for 201110-01), is the Fed being hawkish or dovish?;A) hawkish;B) dovish;11.;Now consider the modified version of the Taylor using the unemployment gap instead of the GDP gap just;like we did in the lectures. Also, we will use the PCE core rate of inflation instead of overall inflation like;you used above - the Fed arguably cares more about core inflation than overall inflation.;Modified Taylor Rule formula;iff TR = r* + A + 0.5[ A - *] + (-1.25) [URA - NAIRU];Additional needed data from Federal Reserve data from October 1, 2011;Unemployment Rate URA = 8.7%;NAIRU = 5.5%;Inflation PCE Core (actual inflation) A = 1.8%;Now what is the federal funds rate implied by the modified Taylor Rule above?;A) -.45;B) -.30;C) 0.45;D) 0.30;12.;According to the actual federal funds rate, is the Fed being hawkish or dovish?;A) hawkish;B) dovish

Paper#15511 | Written in 18-Jul-2015

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