Question

1. You are given the following equations for the real and monetary sectors of a specific economy;

Real Sector Equations: C = 10,000 + 0.8 (Y – T); I = 20,000 – 6000 r; G = 29,000; T = 5,000 + 0.1 Y X = 10,000; M = 5,000 + 0.1 Y.

Monetary Sector Equations: Ms = 75,000; Md = 0.5 Y – 7,000 r; Yp = 200,000.

Here, C = Consumption; Y = GDP = Income; T = Taxes; I = Investment; r = interest rate; G = Govt. purchases; X = Exports; M = Imports; Ms = Money Supply; Md = Money demand.

The equilibrium condition for the real sector is: Y = C + I + G + (X – M).

The equilibrium condition for the monetary sector is Ms = Md.

Based on the given information for the economy,

(a) The real sector equilibrium equation or IS is: Y = _______________ - ___________ r.

(b) The monetary sector equilibrium equation or LM is: Y = ____________ + _________ r.

Answer #1

(a) Real Sector equilibrium equation:

At equilibrium; Y = C + I + G + X -M

=> Y = 10,000 + 0.8(Y-T) + 20,000 - 6000r + 29,000 + 10,000 - (5,000 + 0.1Y)

=> Y = 69,000 + 0.8(Y - (5000 +0.1Y)) - 6000r - 5000 - 0.1Y

=> Y = 64,000 + 0.8(Y - 5000 - 0.1Y) - 6000r - 0.1Y

=> Y = 64,000 + 0.8(0.9Y - 5000) - 6000r - 0.1Y

=> Y = 64000 + 0.72Y - 4000 - 6000r - 0.1Y

=> Y = 60,000 + 0.62Y - 6000r

=> (Y - 0.62Y) = 60,000 - 6000r

=> 0.38Y = 60,000 - 6000r

=> Y = (60,000 - 6000r)/0.38

**=> Y = 157,894.74 - 15,789.47r** (**Real
sector equilibrium equation or IS)**

**-------------------------------------------------------------------------------------------**

(b) Monetary sector equilibrium:

At equilibrium, Ms = Md

=>

75000 = 0.5Y – 7000r

0.5Y = 75000 + 7000r

Y = (75000 + 7000r) / 0.5

**Y = 150000 + 14000r (Monetary sector equilibrium
equation or LM)**

Assume the following equations for the goods and money market of
an economy:
C = 250 + .8(Y-T)
I = 100 - 50r
T = G = 100.
Ms = 200
Md = 0.2Y – 100r
a) Derive the LM curve from the Md and Ms equations given above.
Is this upward or downward sloping? The LM curve is written as Y =
__ +/-__r.
b) Using the equation of the original IS curve and the LM curve
in part...

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The following equations describe a small open economy.
[Figures are in millions of dollars; interest rate (i) is in
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Goods Market
Money
Market
C = 250 +
0.8YD
L = 0.25Y – 62.5i
YD = Y + TR –
T
Ms/P = 250
T = 100 + 0.25Y
I = 300 – 50i
G = 350; TR = 150
Goods market equilibrium condition: Y = C + I...

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G = 110
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The US Macro economy is represented by the following
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Financial Sector:
L = Md/P = 0.5Y – 50i Ms/P = 2000
Real Sector:
AD = C+I+G C = 600 + 0.8YD G = 800 I = 400 –
40i TA = 0.25Y
TR = 250 YD = Y–TA+TR
Set up the IS relationship (2 points)
Step 1, convert C to a function of Y; step 2, set...

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Y = C(Y - T) + I(r) + G
C = 200 + 0.80(Y - T)
I = 300 - 2r
G = 400
T = 200
(M/P)d = 0.80Y - 8r
Ms = 5,600
Price-level = P = 2
What is the equilibrium level of GDP?

Given an economy described by the following set of
equations.
Y = C(Y - T) + I(r) + G
C = 200 + 0.80(Y - T)
I = 300 - 2r
G = 400
T = 200
(M/P)d = 0.80Y - 8r
Ms = 5,600
Price-level = P = 2
What is the equilibrium level of investment?

Given an economy described by the following set of
equations.
Y = C(Y - T) + I(r) + G
C = 200 + 0.80(Y - T)
I = 300 - 2r
G = 400
T = 200
(M/P)d = 0.80Y - 8r
Ms = 5,600
Price-level = P = 2
What is the equilibrium level of consumption?

Given an economy described by the following set of
equations.
Y = C(Y - T) + I(r) + G
C = 200 + 0.80(Y - T)
I = 300 - 2r
G = 400
T = 200
(M/P)d = 0.80Y - 8r
Ms = 5,600
Price-level = P = 2
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An economy is initially described by the following
equations:
C = 500 + 0.75(Y - T); I = 1000 - 50r; M/P = Y - 200r;
G = 1000; T = 1000; M = 6000; P = 2;
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b. What is the equation for the IS curve?
Y =
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Y=
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