Question

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 A consumption C=300+0.75*(Y-T)-20*r, investment function is I=700-80*r, government spending and tax are both 500. Derive the IS curve and then plot the IS curve when real interest rate is between 0 and 8.

(3) Still consider the country A, suppose the government decide to increase the government spending from 500 to 600, what is the new IS curve if other conditions are the same as described in (1) and (2)? Compare your answer of (2), how much does the IS curve shift?

Answer #1

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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 IS-LM model:
C=400+0.25YD
I=300+0.25Y-1500r
G=600
T=400
(M/P)D=2Y-1200r
(M/P)=3000
1-Derive the IS relation with Y on the left-hand side.
2-Derive the LM relation with r on the left-hand side.
3-Solve for equilibrium real output.
4-Solve for the equilibrium interest rate.
5-Solve for the equilibrium values of C, and I, and verify the
value you obtained for Y adding C, I and G.
6-Now suppose that the money supply increases to M/P=4320. Solve
for Y, r, C and I...

20) Which of the following best defines the LM curve?
A) the combinations of i and Y that maintain equilibrium in
the goods market
B) illustrates the effects of changes in i on investment
C) illustrates the effects of changes in i on desired money
holdings by individuals
D) the combinations of i and Y that maintain equilibrium in
financial markets
21) Based on our understanding of the IS-LM model that takes
into account dynamics, we know that a reduction...

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-...

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...

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...

Suppose the demand for real money balances is Md/P = L(Y, i),
where L(Y, i) is an increasing function of income Y and a
decreasing function of the nominal inter- est rate i. Assume that
the interest elasticity of money demand is infinite when the
nominal interest rate is zero. Money-market equilibrium is
represented by the equation Ms/P = L(Y, i), where Ms is the money
supply controlled by the central bank and P is the price level. The
LM...

Problem 2. Consider the following example of
the IS-LM model:
C = 340 + 0.5(Y–T)
I = 400 – 1500(r + x) G = 150 T = 100 x=0.02
r = 0.04 ?e = 0.02
(1) Derive the IS equation.
(2) Find the equilibrium value of Y.
(3) Write down the zero lower bound constraint. Does the real
interest rate of r=0.04 satisfy the constraint?
(4) Suppose that the risk premium x has increased to x=0.09.
(a) Derive the new...

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...

3) Which of the
following occurs as the economy moves leftward along a given IS
curve?
A) An increase in the
interest rate causes investment spending to decrease.
B) An increase in the
interest rate causes money demand to increase.
C) An increase in the
interest rate causes a reduction in the money supply.
D) A reduction in
government spending causes a reduction in demand for goods.
E) An increase in taxes
causes a reduction in demand for goods.
5)...

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