Question

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) Find the short run equilibrium level of output and real interest
rates.

Suppose that the government decides to stimulate the economy by
increasing the level of government spending to G = 22.

d) Find an expression for the new IS curve.

e) Draw a graph of the new IS curve on the same diagram with the
old IS curve and the old LM curve.

f) Looking at your graph, what do you expect will happen in the
short run to output and real interest rates?

g) Verify your previous answers by computing the short run
equilibrium level of output and real interest rates.

Suppose that the Federal Reserve Bank decides to stimulate the
economy by increasing the money supply to M = 370. (For this
problem assume that G = 20.)

h) Find an expression for the new LM curve.

I) Draw a graph of the new LM curve on the same diagram with the
old IS curve and the old LM curve.

j) Looking at your graph, what do you expect will happen in the
short run to output and real interest rates?

k) Verify your previous answers by computing the short run
equilibrium level of output and real interest rates.

Answer #1

Consider the following Keynesian (short-run) model along with
the Classical (long-run) model of the economy.
Labor Supply: Le = 11
Capital Supply: K=11
Production Function:
Y-10K.3(Le).7
Depreciation Rate: &=.1
Consumption Function: C=12+.6Yd
Investment Function: I= 25-50r
Government Spending: G=20
Tax Collections: T=20
Money Demand Function: Ld=
2Y-200r
Money Supply: M=360
Price Level: P=2
Find an expression for the IS curve and plot it.
Find an expression for the LM curve and plot it.
Find the short run equilibrium level of...

Consider a small open economy given by the
following:
Consumption Function: Ct = 17.2 + 0.7(Yd)t
Investment Function: It = 24 -100rt
Real Demand for Money: Lt = 6Yt-1400r
Net Exports Schedule: NXt = 8 – 4et
Government Spending: G0 = 36
Tax Collections: T0 = 36
World Interest Rate: r0 = 0.15
Price Level: P0 = 4
Domestic Money Supply: M0 = 2520
Assume further that the economy is currently at the
long-run equilibrium.
(10 points) Graph the situation...

Suppose that in a closed economy with a public sector the
following relations apply: Consumption function: C = 200 + 0.60Yd
where (Υd = Y –T) Desirable investment: Ιp = 400 - 560r Government
expenditure: G = 250 Taxes: Τ = 50 Real money demand for
transactions: 0.5Y Real money demand for speculation: 600 - 2200r
Nominal amount of money: M = 1000 Price level: P = 1.25
A. Find the equilibrium in the commodity market (IS curve).
B. Find...

Suppose desired consumption and desired investment are
?? = 300 + 0.75(? − ?) − 300?
T = 100 + 0.2Y
?? = 200 − 200?
G is the level of government purchases and G=600
Money demand is
?? ?
= 0.5? − 500(? + ??)
where the expected rate of inflation, ??, is 0.05. The nominal
supply of money M = 133,200.
Suppose the full employment output is 2500 and the price level in
the short run is 120....

Consider the following economy (with flexible exchange rate
system):
• Desired consumption: Cd = 300 + 0.5Y − 2000r
• Desired investment: Id = 200 − 3000r
• Government purchases: G = 100
• Net export: NX = 350 − 0.1Y − 0.5e
• Real exchange rate: e = 20 + 1000r
• Full employment: Y ̄ = 900.
• Nominal money stock: M = 4354
• Real money demand: L = 0.5Y − 200r
(a) Find the equations for...

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

Consider the economy of Wiknam. The consumption function is
given by C = 250 + 0.6 ( Y – T ) . The investment function is I =
100 – 20 r . The money demand function is ( M P ) d = Y – 20 r .
Round answers to two places after the decimal where necessary.
a. Government purchases and taxes are both 100. In the
accompanying diagram, graph the IS curve for r ranging from 0...

Consider the following economy: Planned consumption: ? = 900 +
0.5(? − ?) − 180? Planned investment: ? = 950 − 180? Real money
demand: ( ? ? ) ? = 0.5? − 180?
a. (2 pts) Suppose ? = 400, ? = 450, and ? = 9,750. Find an
equation for the IS curve.
b. (2 pts) Find an equation for the LM curve.
c. (2 pts) Find an equation for the aggregate demand curve.
Express the AD curve...

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...

Consider the following model of an open economy:
C = 14000 + 0.9YD -
45000i
YD = Y - T
I = 7000 - 20000i
M = 0
G = 7800
X = 1800
where Y is income, C is consumption,
YD is disposable income, i is the real
interest rate,G is government spending, T is tax,
I is investment, M is imports, and X is
exports.
What is the marginal propensity to save? (1
MARK)
Explain the intuition behind...

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