Question

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. And find the equilibrium values of r and Y.

b. (3 pts) What is the value of the Keynesian-cross tax multiplier? Policymakers wish to shift the IS curve to the left by 450. How much do they need to raise taxes to do so? What are the resulting equilibrium values of r and Y?

Answer #1

Consider the closed-economy model.
(a) Suppose the economy is initially in long-run equilibrium
with Y = Y¯ , r = ¯r, and P = P1. Draw IS-LM and AD-AS diagrams
showing this equilibrium.
(b) Suppose the economy is then hit by an adverse supply shock,
which causes P1 to jump up to P2 > P1. Using Keynesian cross and
money market diagrams, explain what will happen to the IS and LM
curves in the short run as a result of...

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...

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...

The economy is described by the following functions:
C = 100 + 0.8Y D
T x = 10
T r = 40
I = 60 + 0.1Y
G = 80
Nx = 20
Notice that in this example investment is pro-cyclical.
Q1. Write down the definition of aggregate demand, and a
condition that describes equilibrium in the Keynesian Cross
diagram
Q2. Substitute all the information that you were given and find
equilibrium output. Illustrate on the Keynesian Cross diagram.
Q3....

Consider the following Keynesian-cross model of an economy:
Consider the following Keynesian-cross model of an economy:
C = 170 + 0.6 ( Y − T )
I = 250
G = 300
T = 200
By how much would government purchases have to increase in order
to increase the equilibrium level of income by 50?
By how much would government purchases have to increase in order
to increase the equilibrium level of income by 50?

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-...

(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...

Consider the following short-run model of an open economy:
Y = C+I+G+NX
C = 100+(2/3)(Y-T)
I = 200
NX = X-(1/E)IM
X = (1/E)400
IM = (1/6)E Y
Domestic and foreign prices are constant with
P=P*=1. Thus, the real exchange rate is equal
to the nominal rate E.
The policy makers want to achieve the following targets for
output, consumption and net exports: YT=1200,
CT=780 and NXT=0. Show how these targets
can be achieved using government consumption (G), taxes
(T)...

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)...

For the following economy, find autonomous expenditure, the
multiplier, short-run equilibrium output, and the output gap. By
how much would autonomous expenditure have to change to eliminate
the output gap?
C
= 450 + 0.75 (Y – T )
I p
= 200
G
= 140
NX
= 60
T
= 100
Y*
= 3,200
Instructions: Enter your responses as absolute
numbers.
Autonomous expenditure:
Multiplier:
Short-run equilibrium output:
There is (Click to select) a
recessionary an
expansionary no output gap in the...

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