Question

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 NX (r, Y) and Sd(r, Y) − Id(r) and
show the graph characterizing goods market equilibrium for the
given full-employment output level. (5 points)

(b) What are the equilibrium values of the real interest rate, the
real exchange rate, and net exports? (8 points)

(c) Present the goods market equilibrium condition graphically
while depicting all the possible points and intersections using
their correct values (5 points)

(d) Find IS equation (2 points)

(e) Determine the LM equation using the GE price level (4
points)

(f) Using the IS-LM-FE model, evaluate the effects of a rise in
full employment output to Y ̄ = 940 (12 points)

Short run effects on the real interest rate, exchange rate, net
export, real money demand (6 points)

Long-run effects on of the above and the price level. (6
points)

Note that you have to who the effects by calculating the values of
the respective variables

(g) Show the short-run and long-run effects of a rise government
expenditure to 120 (8 points)

(h) Show the short-run and long-run effects of a rise in money
supply to 6531. (8 points)

Answer #1

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....

1. An economy has full-employment output of 5000. Government
purchases are 1000. Desired consumption and desired investment are
given by
Cd= 3600 - 2000r + 0.10Y
Id = 1200 - 4000r
where Y is output and r is the expected real interest rate.
(a) Find the real interest rate that clears the goods market.
Assume that output equals full-employment output.
(b) Calculate the amount of saving, investment, and consumption
in equilibrium.

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...

3. The components of planned aggregate spending in a certain
economy are given by Consumption Function: C = 800 + 0.75(Y - T) –
2000r
Planned Investment: Ip = 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...

9. 16 A CLOSED economy is described as follows: Cd = 100 +
.6(Y-T) - 200r Id = 400 - 1000r L = 0.25Y - 750(i) pe = 0% G = 70 T
= 50 M = 675 P = 6 (NFP = 0, of course, since it is closed) Ῡ =
810
Provide a IS/LM/FE diagram depicting the Short-run equilibrium
and the Long-run equilibrium.
Provide a AD/AS diagram depicting the short run equilibrium and
the long-run equilibrium

THIS IS THE GENERAL EQUILIBRIUM PROBLEM THAT I PROMISED. YOU
FIRST SOLVE FOR THE INITIAL EQUILIBRIUM AS POINT A. WE CONSIDER TWO
DIFFERENT AND SEPARATE SHOCKS (I CALL THEM SCENARIOS). THE FIRST
SHOCK IS TO THE IS CURVE, THE SECOND SHOCK IS A ‘LM’ SHOCK. AGAIN,
WE CONSIDER THESE SHOCKS SEPARATELY SO THAT AFTER YOU COMPLETE
SCENARIO 1 (THE IS SHOCK), WE GO BACK TO THE ORIGINAL CONDITIONS
AND CONSIDER THE SECOND SCENARIO WHICH IS THE ‘LM’ SHOCK.
Consider the...

Consider the following short-run, open economy model of the
economy.
Goods Market
C = 100 + 0.9(Y − T) I = 50 − 7.5r; NX = −50 G = 200; T =
100
Money Market
M = 4,000 P = 10 L(r, Y) = Y − 350r
a. (4 pts) Derive the IS and LM equations and put them on a
graph with the real interest rate (r) on the vertical axis and real
GDP (Y) on the horizontal axis....

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)...

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 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...

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