Consider an economy in which taxes, planned investments, government spending on goods and serves, and net exports are autonomous, but consumption and planned investments change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investments, government purchases of goods and serves, and net exports:
Ca=1500-10r c=0.6 T=1800 Ip=2400-50r G=2000 NX=-200
A. Compute the value of the marginal propensity to save.
B. Compute the amount of autonomous planned spending, Ap, given that the interest rate equals 5.
C. Compute the equilibrium level of income, given that the interest rate equals 5.
D. Suppose that autonomous consumption changes by 4 percent of any change in household wealth and that the decline in the housing market in 2006-07 and drop in the stock market in the summer of 2007 reduces household wealth by $750 billion. Compute the decrease in autonomous consumption that results from the decline in household wealth.
E. Calculate the new amount of autonomous planned spending, Ap, and the new equilibrium level of income, given that the interest rate equals 5.
F. Using your answers to parts c-e, compute the value of the multiplier.
G. Fiscal and monetary policymakers can respond to the decline in household wealth by taking actions that restore income to its initital equilibrium level. Fiscal policymakers can increase government spending or cut taxes or do both. Monetary policymakers can reduce interest rates. Given the values of the multiplier, the tax multiplier, and the balanced-budget multiplier, compute by how much:
Government spending must be increased in order to restore the initial equilibrium level of income, given no change in taxes or the interest rate.
Taxes must be cut in order to restore the initial equilibrium level of income, given no change in government spending or the interest rate.
Government spending and taxes must be increased in order to restore the initial equilibrium level of income, given no change in the government budget balance or the interest rate.
The interest rate must be reduced in order to restore the initial equilibrium level of income, given no change in government spending or taxes.