Question

**IS-LM Model (Closed Economy)**

The following equations describe a small open economy.

[Figures are in millions of dollars; interest rate (i) is in percent]. Assume that the price level is fixed.

**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 + G + X-M

Money market equilibrium condition: L = Ms/P

a) What is the equation that describes the IS curve
(Y_{IS})?

b) What is the equation describing the LM curve
(Y_{LM})?

c) What are the equilibrium levels of income (Y_{o}) and
interest rate (i_{o})

d) Suppose Government reduces the marginal tax rate (t) from 25% (as given in the model) to 15%.

i) Calculate the change in the level of income (*Y*) and
interest rate (*i*) that results from this fiscal expansion
whilst nominal money supply remains the same.

ii) Calculate the magnitude of crowding out that will result from the above fiscal

expansion.

Answer #1

ECO308W Intermediate Macroeconomics Name:
Dr. Schmidt Spring 2019
Quiz #4: IS-LM Equilibrium
The US Macro economy is represented by the following
equations:
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...

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...

Assume the following equations summarize the structure of an
open economy:
C= 500 +
.9 (Y –
T)
Consumption Function
T = 300 +
.25
Y
Tax
I = 1000
– 50 i Investment equation
G =
2500
Government
Expenditures
NX = 505
Net Export
(M/P)d =
.4 Y -37.6 i Demand for Money (i= interest rate)
(M/p) s =
3000
Money Supply
5- Derive the equation for the LM curve.
6-...

Suppose that the following equations
describe an economy.
Y = Cd +
Id + G
Cd = 180 +
0.8(Y – T)
Id = 140 –
8r + 0.1Y
T = 400
G = 400
(Md/P) = 6Y – 120i
MS = 6000 i = πe +
r
Assume expected inflation
πe = 0 and price level P = 1.
Find the equation for the IS curve.
Find the equation for the LM curve.
Find the equilibrium values for output...

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....

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

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...

3. The IS-LM Model
Consider an economy characterized by the following equations for
consumption (C), investment (I), government spending (G), taxes
(T), aggregate demand (Z), output (Y), and the interest rate
(i):
C = 54 + 0.3*(Y – T)
I = 16 + 0.1*Y – 300*i
G = 35
T = 30
Z = C + I + G
i = ?
Suppose the central bank has set the interest rate equal to 2%
(this is, ? = 0.02).
a)...

3. The IS-LM Model
Consider an economy characterized by the following equations for
consumption (C), investment (I), government spending (G), taxes
(T), aggregate demand (Z), output (Y), and the interest rate
(i):
C = 54 + 0.3*(Y – T)
I = 16 + 0.1*Y – 300*i
G = 35
T = 30
Z = C + I + G
i = ?
Suppose the central bank has set the interest rate equal to 2%
(this is, ? = 0.02).
a)...

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;...

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