Question

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 the price level, P

(D) now suppose that the recent testimony of Janet, Yellen, Chair of the Federal Reserve OMC, changes people's expectations of inflation so that pi^e increases to 0.10. What are the new short-run levels of prices, P, the real interest rate, r, and output, Y?

(e) What are the new long-run levels of prices, P, the real interest rate,r and output, Y?

Answer #1

Suppose the economy is described by the following equations:
C = 350 + .7(Y – T)
I = 100 + .1Y - 1000i
G = 500; T = 500
Money Supply (M/P)s = 3200
Money Demand (M/P)d = 2Y – 4000i
a.Write an equation for the IS relation.
b.Write an equation for the LM relation.
c.Find the equilibrium levels of Y and i.
d.Write the Aggregate Demand equation for this economy with Y
as a function of P.
e. Suppose...

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;
where Y is income, C is consumption, I is investment, G is
government spending, T is taxes, r is the
real interest rate, M is the money supply, and P is the price
level.
a. Derive the IS equation and the LM...

An economy is described by the following equation:
C = 1600 + 0.6 (Y - T) - 2000 r
IP = 2500 - 1000 r
G = 2000
T = 1500
C is the consumption, IP is the planned investment, G
is the government spending, T is the net taxes, r is the real
interest rate.
This economy is a closed economy meaning that the Net Exports
are always 0, i.e. NX = 0.
a. Find an equation relating the...

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...

An economy is described by the following equations:
C = 100 + 0.75(Y – T)
IP = 50
G = 150
NX = 20
T = 40
What is the marginal propensity to consume (MPC) in this
economy?
Find the autonomous expenditure (the part of PAE that does not
depend on Y)
What is the equilibrium level of output?
Assume that the economy is NOT in equilibrium, and the level of
output is Y=1,200. How much is planned spending (PAE)?...

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 closed economy that is described by the following
functions:
C = 20 + 0.5Y D
T x = 10
T r = 40
I = 100 ? 10 · i
G = 40
where i is the interest rate in the economy.
Q1. Suppose originally i = 1. Find equilibrium output.
Illustrate on the Keynesian cross diagram.
Q2.Suppose now the interest rate increases to i = 2. Find new
equilibrium output. Illustrate the change on the Keynesian cross...

1. Suppose an economy is described by the consumption function
C=1,100+.8(Y-T), I= 2,000-200r, T=1,000, G=1,300, Y=15,000. What is
the equilibrium real interest rate? 2. Consider the following data
for a closed economy: Y = $20 trillion C = $12 trillion T = $6
trillion Spublic = $2 trillion A. What is the level of private
savings for this economy? B. What is the level of Government
Purchases for this economy? C. What is the level of investment for
this economy?

3. Using the following information about the current
economy:
C = 130 + 0.80(Y-T) where: C: consumption, Y: output
I = 680 -1200r T: taxes, I: Investment, r: real interest rate
T = 70 G: government
G = 110
(M/P) d = 0.6Y – 960r where: (M/P) d : money demand
Ms = 2364 Ms: money supply
P = 1.0 P: price level
(You must show the steps to derive these answers.)
a. Derive the equation for the IS curve...

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...

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