f07 ec51 ps6

f07 ec51 ps6 - Economics 51D 12 October 2007 PROBLEM SET 6...

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Economics 51D 12 October 2007 PROBLEM SET 6 1. Suppose we are currently at an equilibrium in the market for investment, where investment is equal to $1600 billion and r = .075. The government increases spending by $150 billion without increasing taxes at all. A. Suppose that consumption is completely insensitive to changes in the interest rate, but the interest elasticity of investment demand is -1.2. How much will the quantity of investment and interest rates change because of this increase in government spending? B. Now re-do part A, but suppose that the interest elasticity of consumption demand is -.5, and consumption is $6000 billion before the increase in government spending. C. Assume that the marginal propensity to consume is .88, the marginal propensity to import is .11, and the income tax rate is .22. How much does the Aggregate Demand curve shift in these cases? D. What should happen to the medium-run and long-run aggregate supply curves? 2. Suppose the Fed sets the required reserve ratio at 8%. In addition, people like to hold $1.19 in cash for each $1 of deposits they hold. A. What’s the money multiplier? B. If bank reserves are $40 billion and currency is $900 billion, what’s the money supply (in terms of M1)? C.
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This note was uploaded on 03/31/2009 for the course ECON 5161 taught by Professor Fullenkampf during the Fall '07 term at Duke.

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f07 ec51 ps6 - Economics 51D 12 October 2007 PROBLEM SET 6...

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