Topic 4. Short-run national income model In a traditional static nation income model that captures the GDP accounting, Y

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Topic 4 Short Run National Income Model In A Traditional Static Nation Income Model That Captures The Gdp Accounting Y 1 (518.59 KiB) Viewed 16 times

Topic 4. Short-run national income model In a traditional static nation income model that captures the GDP accounting, Y=C+I+G, in a closed economy without international trade, behavioral assumption for each of the components is made. Consider the following set of equations: C = 100+ 0.3(Y – T) where T is taxes I= 40 - 100R where R is the real interest rate G= 0.1Y (a) Identify the endogenous variables. (b) Write the expression for the equilibrium income in terms of R and T in this economy. (C) Suppose i) government budget must be balanced; ii) the real interest rate, R, is 1%. Find the value of equilibrium national income. (d) Suppose the nominal interest, i, is 3%. What is the expected inflation in this economy? (e) Suppose that there is an announcement that the central bank will very likely to print more money next year. What happens to expected inflation? (f) Suppose expected inflation is revised to 3%, but the nominal interest rate is sluggish to adjust mainly due to the fact that long-term contracts are costly to rewrite and renegotiated. Then, what would happen to GDP? What would be the new level of GDP?