Macroeconomics – Summative Assessment Part 1 – Model determination Model: AE = C + I + G +(X-M) C = XXXXXXXXXX8Yd I = 245 -25i G = 310 X = 145 M = 0.1Y T = 0.25Y Yp = 2000 Ms = 500...

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Macroeconomics – Summative Assessment Part 1 – Model determination Model: AE = C + I + G +(X-M) C = 200 + 0.8Yd I = 245 -25i G = 310 X = 145 M = 0.1Y T = 0.25Y Yp = 2000 Ms = 500 Md = 900 – 100i (For ease of calculation, treat percentage interest as a whole number ex: 10% interest as i=10) Assume, unless otherwise state, that the economy falls into the Keynesian range of the SRAS Part A: Initial Equilibrium a) Exogenous and Engogenous variables. b) Determine i* c) AE0 d) z* e) Multiplier f) Induced consumption g) Y* h) NX i) BB j) What is the Size and the Type of the output Gap, if any. k) Without MP, FP, how would the economy return to equilibrium? l) According to Keynes, why would that be difficult? Part B: Monetary Policy Suppose The central bank decides to increase MS up to 700. a) Determine the new i b) Change in AE0 c) New equilibrium output d) What is the Size and the Type of the output Gap, if any. e) In the formulation of this model, can MP solely close gap? Why? f) DRAW full Monetary Transmission Mechanism for this policy change. (Md/Ms; Desired Investment, AE, AD) g) DRAW The expected impact on the exchange rate of this monetary policy? Part C: Fiscal Policy Suppose the ruling government chooses to change G to eliminate the output gap. a) Determine G needed to close gap b) What is impact on BB, NT c) DRAW BB and NT and show the impact of the Fiscal Policy Hypothetically, instead the ruling government chooses to change the tax rate to eliminate the output gap. a) What is Tax rate needed to close the gap? d) DRAW the before and after AD curve as a result of the Tax rate change Part D: Policy Coordination Suppose the Monetary and Fiscal policy described in Part B and Part C occur at the same time. For questions b) – d) of this section, assume the economy is in the normal upward slopping range of SRAS. a) What is the type and size of any output gap? b) DRAW the before (Part A) and after (Part D) AD/AS/LRAS picture. c) Without further adjustments in discretionary policy, how would the economy return to equilibrium? What would be the impact? d) Suppose that full employment output grows by 5% annually. What would be the impact on the output gap? Submission: All parts are submitted via Moodle expect for the DRAW. The requested graphs are to be submitted separately in person at the due date. (Electronic submission via a *.pdf file is also acceptable) The Moodle portion is currently being re-vamped and is currently marked as bugged. Once ready, it will be announced in class and marking “Bugged” will be removed. Do not attempt the summative Moodle until the “Bugged” has been removed. Part 2: Application