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

Consider an economy that is described by the following
equations: C^d= 300+0.75(Y-T)-300r T= 100+0.2Y I^d= 200-200r
L=0.5Y-500i Y=2500; G=600; M=133,200; Pi^e=0.05. (Pi being the
actual greek pi letter sign). Please solve part D and E
(a) obtain the equation of the IS curve
(b) obtain the equation of the LM curve for a general price
level, P
(c) assume that the economy is initially in a long-run (or
general) equilibrium (i.e. Y=Y). Solve for the real interest rate
r, and...

8) Goods Market: Asset Market:
C=70+2/3(Y-T) MS=245
I=100-400r MD=1/2(Y)-100r
G=50
T=50
o What are the IS and LM equations?
o Calculate and show the equilibrium output and interest
rates?
o Considering a Keynesian Model, show graphically what happens
to P, Y, and r in the SR when the there is an increased risk of the
stock market changing the Money Demand by 25 regardless of Y or
r.
o What is the short run Y and r?
o Suppose that...

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