# 19 you are hired by the council of economic advisors

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19. You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The chairperson of the CEA tells you that she believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. She wants to know what policy to pursue to increase aggregate output by \$800 billion. The best estimate she has for the MPC is 0.8. Which of the following policies should you recommend? A. Increase both government spending and taxes by \$800 billion. B. Reduce government spending by \$800 billion and increase taxes by \$800 billion. C. Increase government spending by \$800 billion and reduce taxes by \$800 billion. D. Decrease both government spending and taxes by \$800 billion.
Table 3 20. Refer to Table 3. If 2014 is the base year, the inflation rate between 2014 and 2015 is ________ %, and the inflation rate between 2015 and 2016 is ________ %.
6 PROBLEM SETS. Make sure to write down all steps. Your answers should be rounded to three decimal places . Problem 1 (…./ 5.5) For a given price level of P = 1, the economy of Wakanda can be described as follows: C = 180 + 0.7Y d I = 170 G = 100 EX = 30 IM = 0.1Y d T = 60 1. Calculate the level of income at which the goods market is in equilibrium. 2. Suppose the government of Wakanda decides to raise taxes to balance the budget. Calculate how this affects the equilibrium in the goods market at this price level? 3. Explain whether the effect of this increase in taxes on would have been different if Wakanda was a closed economy. Support your explanation with precise calculations. 4. To derive the equilibrium in the economy of Wakanda, we need to consider the effect of changes in the price level. Both consumption and investment are influenced by prices. C = 200 + 0.7Y d 20P I = 200 30P Firms in Wakanda set their prices as follows: P = 1 + 0.001Y Derive at what level of income and prices the economy of Wakanda is in equilibrium.
7 Problem 2 (…./ 4.5) Use the IS-LM model to answer these questions. Make sure to clearly label the X- and Y-axis. You should also clearly indicate the initial equilibrium and the new equilibrium after the changes described in the question. To describe changes you can use the following symbols: Increase: Decrease: No change: Effect is ambiguous: ? 1. Faced with high costs for following strict health and safety measures during the COVID- 19 pandemic, supermarkets and other stores have increased their prices dramatically. At the same time, households are worried about the future and have increased their savings. Based on the results of your graph, explain how these changes will affect the interest rate (r), investment (I), output (Y), and savings (S). 2. In a country where investment does not depend on the interest rate, the Central Bank purchases government securities in the open market. Based on the results of your graph, explain how this policy will affect the interest rate (r), investment (I), output (Y), and consumption (C). 3. 0