# ECON 104 HOMEWORK #10 (60 points total)

(35 points total) We discussed the idea of crowding out and why it occurs. In this problem we are considering two scenarios: Scenario 1: G rises and the Fed does not accommodate the shock to money demand. Scenario 2: G rises and the Fed accommodates the shock to money demand, as they would if they were committed to the zero bound. (10 points for each correct and completely labeled diagram). Draw three diagrams side by side. On the left, draw a consumption function, in the middle, draw a money market diagram, and on the right, draw an investment demand function. Locate the initial equilibrium as point A, labeling the relevant values using subscript A as in the level of consumption at point A as CA, the level of interest rates as iA, etc.Scenario 1: G rises, no accommodation by the Fed, locate the new equilibrium as point B on all three diagrams, being sure to label your diagrams completely. Show and explain the crowding out that Barro discusses in the Government Spending is no Free Lunch article. In particular, we are assuming total crowding so that Y does not change, along with the assumption of a closed economy. Be sure to explicitly identify the crowding out on the consumption function and investment demand functions that you drew above.Scenario 2: G rises, the fed completely accommodates the shock to money demand so that interest rates remain unchanged (identical to the Romer assumption). Show this development as point C on all three diagrams. (5 points) In the Romer paper, the multipliers that they use assume that the Fed will keep interest rates constant for the foreseeable future. Referring to your diagrams, does this assumption increase/decrease/ or have no effect on the estimated spending multiplier? Explain. (25 points total) Consider the following modeli) C = 1500 + mpc (Y ? tY)ii) I = 800iii) G = 500iv) X ? M = 500 ? mpi (Y)where:t = the (flat) tax ratempc = the marginal propensity to consumempi = the marginal propensity to importsuppose mpc = .80, t = .25, mpi = .2a. (5 points) solve for the equilibrium output b. (5 points) Solve for the (government) spending multiplier.c. (10 points) When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100. In round two, this is an increase in income of 100 to consumers. Trace out exactly where this 100 increase in income goes in the second round and compare to our simpler treatment with a closed economy and lump sum taxes. Hint, there are three leakages to address(again, please be very specific as to where the 100 increase income ?goes? in this second round). d. (5 points) What would happen to the multiplier if the mpi rises to .25. Please explain the intuition.CLICK HERE FOR MORE INFORMATION ON THIS PAPER? PRICE?..

## Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
\$26
The price is based on these factors:
Number of pages
Urgency
Basic features
• Free title page and bibliography
• Unlimited revisions
• Plagiarism-free guarantee
• Money-back guarantee
On-demand options
• Writer’s samples
• Part-by-part delivery
• Overnight delivery
• Copies of used sources
Paper format
• 275 words per page
• 12 pt Arial/Times New Roman
• Double line spacing
• Any citation style (APA, MLA, Chicago/Turabian, Harvard)

# Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

### Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

### Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

### Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.