Question

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 for this economy.

b. Derive the equation for the LM curve for this economy.

c. Using (a) and (b), determine the equilibrium r and Y for this
economy.

d. Suppose government decides to increases taxes by 10 so that now
T=108. Derive the

new relevant equation(s), and determine the new equilibrium r and
Y.

Answer #1

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...

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...

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...

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 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
What is the equilibrium level of consumption?

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.8(Y – T)
T = 1,000
I = 800 – 20r
G = 1,000
Y = C + I + G
Ms/P =
Md/P = 0.4Y –
40r
Ms = 1,200
A. Write a numerical formula for the IS curve, showing
Y as a function of r alone. (Hint:
Substitute out C, I, G, and
T.)
B. Write a numerical formula for the LM...

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 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....

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