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##### Eco104 Homework 10

**Description**

solution

**Question**

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 importsuppose 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 100to 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;iffTR = 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 2011-10-01), 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;iffTR= 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#55913 | Written in 18-Jul-2015

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