Quiz 4-

1. Use the simple Keynesian model developed in class to analyze the economy described by the following information.

C = 20 + .5(Y - T)

TR = 0 (there are no transfers in this economy)

T = 40

G = 50

X = 20

M = 30

I = 10

Yfe = Y full employment = 150

a. Examine this data. What can you conclude about government savings given this data? Explain your answer.

b. Examine this data. What can you conclude about capital inflows into this economy? Explain your answer.

c. Determine the equilibrium level of GDP for this economy. Show any formulas you use and show your work to get full credit for this answer.

d. Consider your answer in (c) and compare it to Yfe. What do you know about this economy's performance? What do you know about the unemployment rate in this economy? Explain your answer.

e. Suppose the government decides to enact fiscal policy in order to reach full employment. Suppose the government enacts a change in government spending to reach this goal. Calculate what this change in government spending must be in order for this economy to reach full employment. Assume everything else is held constant. Show your work.

2. Consider the AD/AS model of the aggregate economy developed in class. Assume this model is initially in long-run equilibrium where the economy is producing at Yfe.

a. Suppose that there is a negative demand shock to this economy. Given this change, and holding everything else constant, what do you predict will happen to the aggregate level of real GDP and the aggregate price level in the short run? Explain your answer (it's fine to use a graph to illustrate your answer, but include explanatory words as well).

b. Given the negative demand shock described in (a), what happens to the unemployment rate in the short run? Explain your answer.

c. What do you predict will happen in this economy in the long run given this negative demand shock and holding everything else constant? Explain your answer.