related-to-solved-problem-102-on-page-329-the-federal-government-in-the-united-states-has-been-runni

Question

(Related to Solved Problem 10.2 on page 329 ) The federal government in the United States has been running large budget deficits. Suppose that Congress and the president take actions that turn the budget deficits into budget surpluses.
a. Use a market for loan able funds graph to illustrate the effect of the federal budget surpluses. What happens to the equilibrium real interest rate and the quantity of loan able funds? What happens to the level of saving and investment?
b. Now suppose that households believe that surpluses will result in Congress and the president cutting taxes in the near future in order to move from budget surpluses to balanced budgets. As a result, households increase their consumption spending in anticipation of paying lower taxes. Briefly explain how your analysis in part (a) will be affected.

Erwin Antoni · Accepted Answer

So if the government goes from running large deficits and eating up a lot of the low nable funds supply to having no deficit it all and having a budget surplus now what&#x27;s happening is the supply of low noble funds is being increased. So that represents a rightward shift of the supply curve in this case from esto es one that&#x27;s going to cause the quantity of low noble funds to go up and the interest rate toe fall. The demand curve, however, has not been affected. Now, in the second part of the question, we wonder that if the government plans to eliminate the surplus through tax cuts, then what will happen to this diagram that we have here? Well, in that case, since consumers were planning on spending the tax cut, one of two things will happen. Either one. Their savings will be unaffected because the money that they&#x27;re spending is just the tax cut money. So savings is not actually being affected. It&#x27;s just that they have more money to spend now because they&#x27;re paying less in taxes, so nothing changes. The other option, though, is that they spend even more than the tax cut now if that&#x27;s the case than that. Extras spending money has to come from somewhere and it will come from their savings. That would reduce the supply of low noble funds, which would reduce the quantity of low noble funds and raise the interest rate.

Erwin Antoni · Answer

for this question. We&#x27;re looking to increase the economy by $0.3 trillion we get that by very simply just taking the difference between where the economy is at now and where its potential is. In the first question, we have to use the spending multiplier because we&#x27;re trying to figure out how much government spending needs to increase in order to after the multiplier effect increased the economy by 0.3 trillion. So we have a couple of equations. We have an equation for calculating the spending multiplier, and we have an equation for calculating the tax cut multiplier. So all we&#x27;re going to do is, since we have two of the three pieces of information, we&#x27;re gonna plug those pieces of information into each equation and then solve for the remaining variable. So in the first instance, we have the spending multiplier. That&#x27;s to the change in real GDP. That we&#x27;re looking for is 0.3, in this case, $0.3 trillion and the change in spending is what we&#x27;re trying to find. And if you just do simple algebra, nothing fancy. You&#x27;ll find that it&#x27;s 0.15 again in this case $0.15 trillion. We do the exact same process for the tax cut multiplier equation, and we get 1.6 is equal to 0.3, divided by ex Solving for X is $0.1875 trillion in tax cuts, so we can either spend $0.15 trillion or we can cut taxes by 0.1875 trillion dollars. Now, for the third part, they&#x27;re asking you to create an example using a combination of both. Probably the easiest way to do this is to just take half of each, because if you take half of each, you&#x27;re getting half the effect. And if you add those two halves together, you get the whole effect, which is $20.3 trillion. Maur, innit? Economic output. So in that case, spending is half of the original Mount, so it&#x27;s $0.75 trillion tax cuts would be half of the original amount, which would be $0.9375 trillion

Christopher Dzorkpata · Answer

Hello. Uh huh. I&#x27;ve provided uh you know uh written as foundation for you uh for all the questions. Uh I hope you find this useful because there&#x27;s a lot of questions. Right? So this is the first part of your question. Uh You have to draft there and then have the explanation below. Uh So you can read that out. I don&#x27;t want to bore you with the reading. Let&#x27;s take other parts of this. The beeper. Which is the I think it&#x27;s asking about the impact on public saving and private saving for this. All the information that you need to know. I read about it and then the last part but you C. D. And E. Are provided enough explanation for you so hopefully this is useful. Okay Thank you very much.

Alex Loukas · Answer

in question aid, Western Aid says, as described in the chapter, the Federal Reserve in 2008 phase that decrease in great demand caused by the housing and financial crises and a decrease in short run Hagrid supply caused by rising commodity prices. Party asks starting from it longer An equilibrium illustrate the effects of these two changes, using both an average supply agree demand diagram and a Phillips Curve diagram on both diagrams labeled Initialed longer in a polygamous point day. And there is a resulting short lapse sort. Veronica Liberal this point beat for each of the following variable state, whether it dries are false or whether the impact is ambiguous output, Employment price. Live on inflation. All right, so here of dawn, two graphs and I stayed there two possibilities. I explain what this means in a while, but let&#x27;s take a look at the first crap on the top. Left Standard standard aggresive migrated monograph as always, it longer and I grew. Supply curve will be vertical interested. It will intersect the X axis at the natural level found with y one and the economy&#x27;s at the Point A, which is the intersection of 81 S R A s one. So point it is ah longer in the live room. And we know that the economy is facing a very negative shock and agri demand. So the A D curved ships from 81 82 right here, chips to the left. And on the other hand, we also have ah, negative agreed supply shuck from rising commodity prices. So the shore drive degrees of lacquered ships also ships to the left from S R. A s one s R A s suit right here. So the resulting, um, recessionary equilibrium will be a point B, which is the intersection of 82. When s sorry is too. And this will result result unambiguously, uh, lower level out. But why, too? So the difference between y one y two is a recession ago. So here in the first draft, we can see that the, uh, um price level will drop from p one to pee, too. However, if we take a look at the diagram, it the bottom. I&#x27;ve drawn exactly same diagram, but with it with some with a little change. The every demand curve shifts less, um, as compared to the shoulder anger supply curve and the new equilibrium results again. Lower level but results in the higher price level. P, too, so we can say that came back from the price level. Some Vegas, because it depends on the magnitude of the change of the agreed amount, agreed. Supply curve. So if the aggregate men shock is more first, the price level will drop. If the accurate supply curve is more first, the price will rise because companies will adjust their protection plans accordingly to reflect there&#x27;s supply shop. So just for the sake of exposition, gonna assume that the price level will rise because this is easier to illustrate the Phillips Curve diagram, which I have drawn here on the right. As always, the longer and Philip&#x27;s curve intersects the X axis at the natural level. Felt what you want. The economy is initially a coin A, which is the intersection of the Longer and Philip&#x27;s curve with the short run Phillips curve right point A is the long run equilibrium resulting in inflation rate of Hae won. Uh, and now, first of all, the grain supply shock negative aggregate supply shop will shift the short run Phillips curve higher. So the economy and the policy there&#x27;s air facing, uh, it less favorable, favorable trade off between inflation and prices prices meaning that for each level of unemployment, the prices will be higher or for each inflation, so the unemployment rate will be higher. And since we assumed that the price level will rise in the comet&#x27;s going from point A to point B right here first the Philips air shifts and then the economy because of the anger demand shock moves along the Phillips curve to the right. So as you can see, that lower level found the course wants to a higher unemployment rates. And the increase in the price level also corresponds to an increase in the inflation rate. Okay, In part b, suppose the Fed response quickly to these shocks in adjust monetary policy to keep unemployment and output at their natural levels. What action would it take on the same set of graphs and for today&#x27;s show, the results in labeling you actually room s point c? All right. So as far as the agreed Amanda Gris a flicker is, ah is concerned, we can draw the change in any diagrams. The result will be the same I have drawn. I&#x27;ve decided to join up with the 1st 1 so we know we are at point B, right? 82 s. Sorry is too. We know that the Fed cannot influence the average supply, but they can influence the agree demand. So what the Fed needs to do is engage in expansionary monetary policy either by increasing the money supply or lowering the interest rate or doing any combination of the two or any other sets of policy tools like, um, unorthodox. Um, I like forward guidance or quantitative easing. And so they want to shift. The agreement occur from 82 83 even higher than before, so that it intersects with a short drive aggressive like her. Who? The second store draggers a flicker of a higher point. So they need to do all this shift in bigger demand curve to restore the economy back to point C right here in the same vein. We can see that happening in the filibuster of diagram. Where&#x27;d point be? An expansionary monetary policy will stimulate, agree demand, and so the economy will move it along the second short term Philips curve all the way from Point B to point C right here. Unemployment is, but it&#x27;s natural level, but the inflation rate will be higher here. I haven&#x27;t drawn it here, but there should be a pi three right here, as you can see and this is related to port, see which acts. Which asks, Why might the Fed choose not to pursue the course of action described in Part B? Well, we just answered it in a way that if they do engage in an aggressive expansion policy, they will manage to restore the economy back to its natural level out but and natural level of employment. But this will result in the higher, possibly much higher inflation rate. Uh, this should be it should correspond to something like P three right here or pie three here. So the policy makers might my deem inappropriate to accept such a high level of inflation in order to reduce um, in order to close the Recessionary Cup, and this might be a reason not to pursue such course of action

Alex Loukas · Answer

moving on to question for suppose the economy&#x27;s in a longer and equilibrium party, drove the economy short run and longer, and Phillips curves well. That shouldn&#x27;t be very difficult, because we&#x27;ve done a couple of times now eso here on the left of drawing a very simple standard graft on the exact So we have the unemployment level, you on the y axis. We have inflation. Great time as always, the longer and Philip&#x27;s curve will be vertical and intersect. The exact is that the natural live off unemployment you won and, of course, the next in the downward sloping shoulders. Philips Curve will dissect the the longer filter midpoint A, which is where the economy is that since we&#x27;re in the long run equilibrium and appoint a the national level for unemployment inflation. Reply one prevail now in part B. Suppose a wave of business pessimism reduces agree demand show the effect of this shock on your diagram from partying. If the Fed undertakes expansionary monetary policy, candid return, the economy, the regional inflation rate and unemployment rate. Well, uh, here we&#x27;re dealing with negative agree demand shock. So from what we know from theory, the economy will shift along the Phillips curve so the folks care will not move. But the comet will move it on from point A to point B sins and agree Demand to think about the aggressive Langree demand graph. Agreed The man moves to the to the left so the new output level will be lower. There will be a recessionary God. And here this is reflected, uh, with the higher level, find employment. You too. And on the other hand, since the price level drops, we&#x27;ll also have a lower level of inflation High too. So where? Point B, higher unemployment, lower inflation? No in part. See, suppose the economy&#x27;s back in longer an equilibrium and then the price of imported oil rises. So the effect of this shock within your diagram and think what happens if the Fed undertake expansion? Montree policy And what happens when the Fed undertakes contractionary Montree policy? Well, this is even more interesting now. Every drawn the graph, the same graph on the right, and and now we know that the economy is being hit by supply shock. A serious one. This is kind of like what happened in the mid seventies and late seventies the U. S. And the rest of the world When OPEC decided to increase the price of oil, we&#x27;re dealing with a very bad supply. Shock s o the economy. Now the Sergeant Phillips Group will move S R P c once I start BC two to the right and they com e moves Appoint a here in the right to point C So the economy is experiencing a higher level of unemployment, which corresponds slower out bud and a high inflation rates. This is really bad, right? So we&#x27;re dealing with a classic tail off stagflation. Like exactly what happened The U S and, uh, in the seventies, Anais early eighties. Now, what can the fed do? If the Fed engages in expansionary monetary policy, it can return the economy to its original unemployment rate at point D. So remember nowhere Point C on the higher and shortening Philips curve, we can move it along it too pointy. Uh, the unemployment level goes back to you one, however ah, higher level of inflation will prevail. Okay, Bye. Three. This is a trade off. On the other hand, if the Fed engages in contractionary month to policy, it kind of returned the economy. That&#x27;s original inflation rate of point e right move along the other side of the new Philips curve. But the new level find employment will be even higher will be somewhere here. You three. I have a noted down by will be even higher. So this is not the same. It&#x27;s part, eh? Apart. Be sorry assed Barbie. Why&#x27;s this? Let&#x27;s think about it. This situation differs completely from party for Part B because in part of the the economy stayed on the same short on Philip skirt. But now in part, see, we saw that the economy moved to a higher sugar and Philip skirt, which gives policymakers it less favorable, trade off between inflation and unemployment, and these stems from the fact economy&#x27;s been hit by a negative supply shop.

Tristan Wille · Answer

all right, We&#x27;re doing problem number 30 from Chapter four, and it&#x27;s asking us. Predict how each of the following economic changes will affect the equilibrium price in quantity in the financial market for home loans. Sketch demanded supply diagrams for your answers. And then I asked sponges in areas eso let&#x27;s start with scenario a way saying the number of people at the most common ages for homebuying increases so they were supply. We have our demand. Remember that this is the supply and demand for financial loans for home loans. Rather, um, and the scenarios asking is if the number of people increases And if the number of people buying homes increases well, that means the demand is gonna increase. S So here&#x27;s our new equilibrium and interest rate has gone up and quantity has gone up. Um, yeah. Okay, so it says, uh, equilibrium, price and quantity in the question price is equal to interest rate. So now let&#x27;s do part B. Ah, same thing. Price wanted tea supply demand. Part B is asking people gain confidence that the economy is growing and other jobs are secure again. If people are getting confidence, the economy&#x27;s growing, their jobs are secure. We&#x27;re gonna buy a house on Hey, uh, so that&#x27;s gonna increase demand, and we&#x27;re gonna see the same exact shift price up quantity onto part. See, Part sees asking banks that have made home loans find that a large number of people, a larger number of people and expected are not repaying those loans. And so if banks find that a larger number of people been expected or not repaying those loans while they&#x27;re gonna want to issue less loans, So if less moons are issued supply, he&#x27;s gonna shift left. It&#x27;s gonna decrease from our first equilibrium to any legal agreement where price has increased quantity. This decrease, that&#x27;s this is a new equilibrium, um, onto part D, uh D Because of a threat of war, people become uncertain about their economic future. Well, if people are uncertain, they&#x27;re sure not gonna buy a house. So the demand for loans to buy houses is going to go down moving us from our first equipment to a new equilibrium. It&#x27;s the sequel ever. Um, price has fallen. Quantity has fallen. Okay, um, let&#x27;s look at part e. The overall level of saving in the economy diminishes Well, if the overall level of saving the economy diminishes, what&#x27;s gonna happen to the demand of supply? Well, how is the supply of loans created? Well, it&#x27;s coming from people&#x27;s savings, right, because what banks are doing are taking your savings and lending them out and then paying you a very small interest rate for that because you&#x27;re giving them your money, basically. So if the overall level of sailing of saving is diminishing, the supply is going to go down because there&#x27;s a smaller amount of money to make loans with. So we&#x27;re moving to a new equilibrium again. Uh, price are rather supply has decreased, has shifted left, so price is up, quantity down. And finally, we&#x27;re on to part F. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans. Uh, so that&#x27;s pretty obvious then, because the people making the loans are banks, and it&#x27;s cheaper and easier for them to make them well, they&#x27;re gonna be more, aren&#x27;t they? So supply is going to shift from equilibrium. One to equilibrium to price is lower. This equilibrium quantity is jeez, quantity is

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Savers are taxed on the nominal interest payments…

Problem 16 Hard Difficulty

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