I. Consider an economy described by the following equations:
Y = C + I + G + NX
C = 400 + 0.9YD
I = 300 - 2,000i
NX = 100 – 0.05Y – 1,000i
M = (0.4Y – 1,000i)P
With government spending G = $100 billion, the tax rate t = 0.5, the nominal
money supply M = $180 billion, and the price level P = 1.
Assume that prices adjust according to the following price adjustment equation
inflation rate = (Y-1 - Y*)/Y*, where Y* is potential GDP.
Decrease government spending by $20 starting from potential GDP.
1. Put together a 3-year full adjustment path
2. Compare the following starting and ending economic factors:
Y
i
C
Sp
I
NX
P
nominal wage rate
real wage rate
Unemployment rate
II. Show graphically (draw) how an increase of the marginal propensity to save would
be represented using:
1. the goods and services market model
2. the money market model
3. IS-LM model
4. AS/AD model