Question

Consider the example from the previous module:

C=350+0.75(Y-T)-1500r

I= 200-2500r, G=400, T=120+0.2Y

EX=80, IM= 70+0.15Y

L=50Y-800000R

M=6000000, P=120, r=0.25

Recall that the equations for IS and LM curve for this example were:

IS: Y= (1/0.55)/ (870-4000r)

LM: Y= (1/50) /( 50000+800000r)

Suppose the government is considering an expansionary fiscal policy of increasing G by 44:

(a) Was the budget balanced before this policy? How can you say so?

(b) If Fed does not do anything, how much is the crowding out effect of this policy?

(c) Is the budget balanced after this policy? How can you say so?

(d) What is " monetizing budget deficit"?

(e) If Fed monetizes the additional budget deficit to eliminate crowding out, do they need to buy bonds, or sell bonds? Worth how much?

Answer 1