1. Consider an extend ISLM model given by Y =C+I+G C = co +(Y - T) T= 110 I = bo - 1000(i – 7+ r) G= 125 i=.03 I= .05 =

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1 Consider An Extend Islm Model Given By Y C I G C Co Y T T 110 I Bo 1000 I 7 R G 125 I 03 I 05 1 (121.34 KiB) Viewed 30 times

1. Consider an extend ISLM model given by Y =C+I+G C = co +(Y - T) T= 110 I = bo - 1000(i – 7+ r) G= 125 i=.03 I= .05 = .01 a Suppose co = 50, bo = 150. Find equilibrium output, consumption, and investment. b After a natural disaster, potential output, consumer confidence, and firms animal spirits all decline. Mathematically, co = 40 and bo = 140. i Calculate the new equilibrium value of Y and describe the economic intuition of this result. ii Now suppose that the government gives certain victims of the natural disaster economic assistance and tax breaks. As a result, T falls to 90 and G rises to 135. What are output, consumption, and investment now. iii Suppose that potential output is Yn = 390. Would you suggest fur- ther policies by the government to restore output to potential? What if Yn = 370? Explain. What are the implications of these policies for consumption and investment? iv Arguably, a natural disaster would change the risk premium x too. Would you expect I to go up or down after a natural disaster? Why? How would a changing risk premium change equilibrium output? a