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YouhavebeenappointedaseconomicpolicyadvisortotheUnitedStates.

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1.YouhavebeenappointedaseconomicpolicyadvisortotheUnitedStates.Youaretoldthattheeconomyis;significantlybelowitspotentialoutputandthefollowingisprojectedfornextyear:worldoutputwillfall;significantlyandthepriceofoilwillrisesignificantly.;a.Whatismeantbypotentialoutput?;b.Whatwillhappentothepricelevelandoutput?;c.Whatpolicymightyousuggesttothegovernment?;2.;a.Marginalpropensitytoexpendis0.5andthereisarecessionarygapof$200.Whatfiscalpolicywouldyou;recommend?;b.Whydoescuttingtaxesby$100haveasmallereffectinGDPthanincreasingexpendituresby$100?;3.;a.Supposeimportswereafunctionofdisposableincomeinsteadofincome.Whatwouldbethenew;multiplier?Howdoesitcomparewiththemultiplierwhenimportswereafunctionofincome?;b.Explainwhymakingtaxesandimportsendogenousreducesthemultiplier?;4.StatehowthefollowinginformationchangestheslopeoftheADcurve.;a.Theeffectofpricelevelchangesonautonomousexpendituresisreduced.;b.Thesizeofthemultiplierincreases.;c.Autonomousexpendituresincreaseby$20;d.Fallsinthepriceleveldisruptfinancialmarketswhichoffsetthenormallyassumedeffectsofachangein;thepricelevel.;5 a.Youremployeroffersyouachoiceoftwobonuspackages:$1,400todayor$2,000fiveyearsfromnow.;Assuminga6percentrateofinterest,whichisthebettervalue?Assuminganinterestrateof10percent;whichisthebettervalue?;b.Supposethepriceofaoneyear10percentcouponbondwitha$100facevalueof$98.Aremarketinterest;rateslikelytobeaboveorbelow10percent?Explain.Whatisthebondsyieldorreturn?Ifmarketinterest;ratesfell,whatwouldhappentothepriceofthebond?

 

Paper#28549 | Written in 18-Jul-2015

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