Question

**Question 1**

By relying on the IS LM Model explain what will be the effect of a tax cut policy on the equilibrium level of income. Explain in detail the different steps, how does this policy impact the investment?

**Question 2**

Keynesian economics assume that prices are sticky (they do not change) in the short run. It is an assumption shared by classical economics. Explain briefly what are the characteristics of classical economists and according to them what drives the GPD.

**Question 3**

Suppose that economy of Portugal is characterized by the following

C = 200 + 0.5 (Y - T) Represents the consumption function

I = 600 – 30 r represents the investment function

G = 300 represents the public spending

T = 300 represents the level of taxation

(m/p)d = y - 40 r represents the money demand function

(m/p)s = 1500 r represents the real money supply

d Y represents the global output

Find the IS curve the LM curve and deduce the equilibrium level of interest rate equilibrium level of income.

The government increases the money supply by 100. How does it affect the equilibrium level of income? Justify your answer. Calculate the new equilibrium …. Equilibrium level of income

Answer #1

Suppose that economy of Portugal is characterized by the
following C = 200 + 0.5 (Y - T) Represents the consumption function
I = 600 – 30 r represents the investment function G = 300
represents the public spending T = 300 represents the level of
taxation (m/p)d = y - 40 r represents the money demand function
(m/p)s = 1500 r represents the real money supply d Y represents the
global output Find the IS curve the LM curve...

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...

Explain what will be the shape of the LM curve in a liquidity
trap. How will the LM curve shift if there is in increase in the
money supply? Would fiscal policy be effective in changing the
equilibrium output?

1. In the short-run IS-LM model with income taxation, taxes are
given by ?=? +??. Suppose that MPC = 0.75 and the marginal tax rate
?=0.2. Then, when ? decreases by 1000, then for any given interest
rate, the IS curve shifts:
Select one:
a. to the left by 1000.
b. to the right by 3000.
c. to the right by 3750
d. to the right by 1875.
2.
Suppose that the adult population in an economy is 28 million,...

3 Derive IS curve and LM curve mathmatically:
(1) Consider in a country A money supply M=4000, price level
P=3, inflation expectation and liquidity preference is assumed to
be zero to make the calculation simple. The money demand function
L(i, Y ) = Y ? 200 ? (r + ? ^e ). Use the above information to
derive the LM curve mathmatically and then plot it when real
interest rate is between 0 and 8.
(2) Consider in a country...

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)...

(16 marks total) Using the IS-LM model discussed in chapter 10,
suppose you’re given the following information: • The consumption
function is given by C = 40 + 0.5 (Y − T). • The investment
function is given by I = 150 − 10r. • T = 120, and G = 170. (a) Find planned expenditure P E as a function of Y and r. (b)
For the case where r = 8, find the value of Y that
produces...

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...

Use the IS-LM model to predict the effect of an increase in the
money supply on output, Y , and the real interest rate, r in the
short-run.
What is the effect of this policy on these variables in the
long-run? How do you know?

QUESTION 19
In an economy with MPC = 0.8, and according to the goods market
equilibrium equation in the IS-LM model, to increase (equilibrium)
total output, Y, by 8, the government can:
A.
cut/lower the level of taxation, T, by 1.
B.
cut/lower the level of taxation, T, by 2.
C.
increase the level of taxation, T, by 2.
D.
none of the above.
10 points
QUESTION 20
Every point on an IS curve represents:
A.
a combination of...

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