Question

Consider the following model:

C=20+0.5(Y-T)

I=20-10r

T=0

G=50

QUESTIONS:

d) Suppose now that there is a change in public spending so that G=70. What would be the effect on the IS curve? Show your results in a graph.

e) Suppose now that the change in d) is neutral to deficit so that G=70 and T=20. What would be the effect on the IS curve? Show your results in a graph.

f) Suppose now that interest rate decreases to 0.05. Calculate output and represent your results in a graph.

Answer #1

1. Consider an economy with the given equations.
Y=C+I+GY=C+I+G
C=112+0.6(Y−T)C=112+0.6(Y−T)
I=120−10rI=120−10r
(MP)d=Y−15r(MP)d=Y−15r
G=$35G=$35
T=$45T=$45
M=$1200M=$1200
P=3.0
a. Use the relevant set of equations to derive the IS curve and
graph it.
b. What is the equation for the IS curve?
Y =
c. Use the relevant set of equations to derive
the LM curve.
d. Calculate the equilibrium level of income (Y) and
the equilibrium interest rate (r).
Y=
r (%)=
e. Use the relevant set of equations to derive...

Suppose that the following is true for an economy: C = 50 + .8(
DI) T = 150 G = 150 NX = - 50 Note : * you are not given the value
of I a.) Solve for the oversimplified multiplier in this economy.
b.) Now suppose that NX increases by 7. Solve for the CHANGE in
equilibrium real GDP ( on the demand side) . ( c.) Show, on an AE
graph, how both the change in NX...

Suppose that economy of Portugal is characterized by the
following C = 200 + 0.5 (Y - T) Represents the consumption function
I = 600 – 30 r represents the investment function G = 300
represents the public spending T = 300 represents the level of
taxation (m/p)d = y - 40 r represents the money demand function
(m/p)s = 1500 r represents the real money supply d Y represents the
global output Find the IS curve the LM curve...

Given a closed economy in the long run (classical model):
Y=F(K,L)
Y=C+I+G C=c(Y-T)
I=I(r)
G and T set by Government policy.
For the following changes in the economy, show the impact of the
change on the loanable fund market. Use a fully labeled graph.
Also state the impact of the change on the following variables:
Y, C, G, S, I and r.
1) A decrease in Government Spending.
2) A decrease in Taxes.
3) An increase in Investment demand.

C = 3,500 + 0.5(Y - T)
I = I0 = 1,000
G = G0 = 2,000
X = 600
IM = 400
T = T0 = 2,000
Yp = 10,000
Note: Keep as much precision as possible during
your calculations. Your final answer should be accurate to at least
two decimal places.
a) Find autonomous expenditure.
Autonomous Expenditure = $0
b) Find the multiplier.
Multiplier = 0
c) Find short-run equilibrium output.
Short-run Equilibrium Output = $0
d) Find...

(16 marks total) Using the IS-LM model discussed in chapter 10,
suppose you’re given the following information: • The consumption
function is given by C = 40 + 0.5 (Y − T). • The investment
function is given by I = 150 − 10r. • T = 120, and G = 170. (a) Find planned expenditure P E as a function of Y and r. (b)
For the case where r = 8, find the value of Y that
produces...

Consider an economy described by the following
equations:
Y=C+I+G+NX,
Y=8,000
G=2,500
T=2,000
C=500 +
0.75(Y−T)
I=900−50r
NX=1,500−250ϵ
r=r∗=8.
a.
In this economy, solve for private saving, public saving, national
saving, investment, the trade balance, and the equilibrium exchange
rate.
b.
Suppose now that G is cut to 2,000. Solve for private saving,
public saving, national saving, investment, the trade balance, and
the equilibrium exchange rate. Explain what you find.
c.
Now suppose that the world interest rate falls from 8...

Consider an economy that is described by the following
equations: C^d= 300+0.75(Y-T)-300r T= 100+0.2Y I^d= 200-200r
L=0.5Y-500i Y=2500; G=600; M=133,200; Pi^e=0.05. (Pi being the
actual greek pi letter sign). Please solve part D and E
(a) obtain the equation of the IS curve
(b) obtain the equation of the LM curve for a general price
level, P
(c) assume that the economy is initially in a long-run (or
general) equilibrium (i.e. Y=Y). Solve for the real interest rate
r, and...

Consider the example from the previous module:
C=350+0.75(Y-T)-1500r
I= 200-2500r, G=400, T=120+0.2Y
EX=80, IM= 70+0.15Y
L=50Y-800000R
M=6000000, P=120, r=0.25
Recall that the equations for IS and LM curve for this example
were:
IS: Y= (1/0.55)/ (870-4000r)
LM: Y= (1/50) /( 50000+800000r)
Suppose the government is considering an expansionary fiscal
policy of increasing G by 44:
(a) Was the budget balanced before this policy? How can you say
so?
(b) If Fed does not do anything, how much is the crowding...

2) Consider the following Keynesian model of the economy.
Consumption Function: C = 12 + .6 Y d,
Investment Function: I = 25 − 50 r,
Government Spending: G = 20,
Tax Collections: T = 20,
Money Demand Function: L d = 2 Y − 200 r,
Money Supply: M = 360,
Price Level: P = 2.
a) Find an expression for the IS curve and plot it.
b) Find an expression for the LM curve and plot it.
c)...

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