Question

Consider the following Keynesian (short-run) model along with the Classical (long-run) model of the economy.

**Labor Supply: L ^{e} = 11**

**Capital Supply:** K=11

**Production Function:**
**Y-10K ^{.3}(L^{e})^{.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: L _{d=}
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 output and real interest rates.

Find an expression for the AD curve. **(Hint: The
aggregate demand function is found by setting the IS curve equal to
the LM curve to eliminate r while leaving the price level P
unconstrained. So start by LM curve with an unconstrained P, then
replace r with the IS expression you got in part a.)**

Find an expression for LRAS curve.

What are the long run equilibrium values of output, prices, and interest rate?

**(Hint: remember in the long-run, Y is equal to
production function. Plug the long-run value of Y in AD function
and solve it for P. Plug the value of Y in IS and solve it for
r.)**

Suppose that the economy is initially located at the short-run equilibrium found in (c). With the aid of appropriate diagrams (IS-LM and AD-AS), carefully explain what the dynamic adjustment will be as the economy adjusts from the short run equilibrium (c) to the long run equilibrium (f).

Suppose that fiscal policy makers have decided to undertake a policy intervention in which government spending is changed so that the economy moves to the long run output level without impacting prices. (i.e. prices stay at P=2).

What level of G will achieve this target? **(Hint: first,
plug the target Y into the LM and get r, then plug the Y and r into
the expenditure equation and impose the goods market clearing
condition (Y=PE) and get G.)**

Answer #1

IF YOU HAVE ANY DOUBT THEN PLEASE COMMENT BELOW.

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 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...

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,...

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....

The aggregate-demand (AD), short-run aggregate supply (AS), and
long-run aggregate-supply (ASLR) schedules for a given
economy are as follows. The schedules show the GDP price index (P)
versus real GDP (Q), with Q measured in trillions of constant
(real) dollars. Note that ASLR is potential output
(Qf).
P
AD
AS
ASLR
60
7
1
3
90
6
2
3
120
5
3
3
140
4
4
3
160
3
5
3
170
2
6
3
1. Graph the AD, AS,...

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.6(Y – T)
T = 40
I = 120 – 30r
G = 40
Y = C + I + G
Ms/P = Md/P = 2Y – 50r
Ms = 280
Write a numerical formula for the IS curve, showing Y as a
function of r alone. (Hint: Substitute out C, I, G, and T.)
Write a numerical formula for the LM curve, showing...

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.8(Y – T)
T = 1,000
I = 800 – 20r
G = 1,000
Y = C + I + G
Ms/P =
Md/P = 0.4Y –
40r
Ms = 1,200
A. Write a numerical formula for the IS curve, showing
Y as a function of r alone. (Hint:
Substitute out C, I, G, and
T.)
B. Write a numerical formula for the LM...

If a short-run equilibrium occurs at a level of output above the
long-run level of aggregate supply, then in the transition to the
long run what will happen to the price level and to the LM
curve?

MPC=0.6
This is a closed economy. Wages are unable to adjust in the
short run. At first, the economy equilibrium is at Y=Original, and
P=Pe (the expected price level when managers signed contracts for
nominal wages. This is a horizontal short-run aggregate supply
curve.
Consider this: The government increased spending (G) by 215.
A) How will Investment (I) change in the short-run?
B) How will Consumption (C) change in the short-run?
C) How will Output (Y) change in the short-run?...

Assume the following model of the closed economy in
the short run, with the price level (P) fixed at 1.0
C= 0.5 (Y -T)
T = 1,000
I = 1,500- 250r
G = 1,500
Md/P = 0.5Y - 500r
Ms = 1,000
a) Derive the numerical aggregate demand (AD) curve
for this economy, expressing Y as a function of P
b) You are the chief economic advisor in this
hypothetical economy. Do you believe that fiscal policy is more
potent...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 6 minutes ago

asked 7 minutes ago

asked 8 minutes ago

asked 9 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 17 minutes ago

asked 17 minutes ago