Question

8) Goods Market: Asset Market:

C=70+2/3(Y-T) MS=245

I=100-400r MD=1/2(Y)-100r

G=50

T=50

o What are the IS and LM equations?

o Calculate and show the equilibrium output and interest rates?

o Considering a Keynesian Model, show graphically what happens to P, Y, and r in the SR when the there is an increased risk of the stock market changing the Money Demand by 25 regardless of Y or r.

o What is the short run Y and r?

o Suppose that the Fed would like to stabilize the economy. Show how large of a policy they would conduct.

o Compare the magnitudes of the Governmentâ€™s policies if they use only a change in expenditure, only a change in taxes, or only a balanced budget policy

Answer #1

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...

C= 0.8(1-t)Y,r=0.25,I=900-50r,G=900,L=0.25Y-62.5r and
m/p=500 (money market equilibrium)r=interest rate
a) what is the equation that describes the IS curve
b) define IS curve
c) define LM curve
d) calculate equilibrium levels of income Y and interest rate r

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