Question

Suppose the economy is described by the following equations:

C = 350 + .7(Y – T)

I = 100 + .1Y - 1000i

G = 500; T = 500

Money Supply (M/P)s = 3200

Money Demand (M/P)d = 2Y – 4000i

a.Write an equation for the IS relation.

b.Write an equation for the LM relation.

c.Find the equilibrium levels of Y and i.

d.Write the Aggregate Demand equation for this economy with Y as a function of P.

e. Suppose the short-run aggregate supply curve is horizontal at P = 10, and the long-run aggregate supply curve is vertical at Y = 2000, so that the short-run equilibrium Y found in c. is the (long-run) natural or full-employment level of output. Suppose now that M decreases from 32000 to 24000. What are the new short-run and long-run levels of Y and P?

f. Suppose instead, that G increases by 100. What are the new short-run and long-run levels of Y and P?

Answer #1

An economy is initially described by the following
equations:
C = 500 + 0.75(Y - T); I = 1000 - 50r; M/P = Y - 200r;
G = 1000; T = 1000; M = 6000; P = 2;
where Y is income, C is consumption, I is investment, G is
government spending, T is taxes, r is the
real interest rate, M is the money supply, and P is the price
level.
a. Derive the IS equation and the LM...

The next several questions refer to the case of an economy with
the following equations:
Y = 50K0.3L0.7 with K=100 and L=100
G=1000, T=1000
I = 2000- 1000r
C = 200 + 0.5(Y-T)
real money demand: (M/P)d = 0.2Y - 1000r
nominal money supply: M = 3200
(Assume a closed economy: Y = C + I + G. Assume the economy is
in the long run equilibrium.)
compute the nomianl wage (W)

Assume that the long-run aggregate supply curve is vertical at Y
= 3, 000 while the short-run aggregate supply curve is horizontal
at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,
500. (Hint: draw a graph on this page to help you work through this
question)
1) What is the velocity of money in this case?
2) Suppose the aggregate demand function shifts to Y =
(1.5)(M/P). What are the short-run values of...

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...

An economy is described by the following equation:
C = 1600 + 0.6 (Y - T) - 2000 r
IP = 2500 - 1000 r
G = 2000
T = 1500
C is the consumption, IP is the planned investment, G
is the government spending, T is the net taxes, r is the real
interest rate.
This economy is a closed economy meaning that the Net Exports
are always 0, i.e. NX = 0.
a. Find an equation relating the...

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...

Suppose desired consumption and desired investment are
?? = 300 + 0.75(? − ?) − 300?
T = 100 + 0.2Y
?? = 200 − 200?
G is the level of government purchases and G=600
Money demand is
?? ?
= 0.5? − 500(? + ??)
where the expected rate of inflation, ??, is 0.05. The nominal
supply of money M = 133,200.
Suppose the full employment output is 2500 and the price level in
the short run is 120....

A small open economy is described by the following equations: C
= 50 + .75(Y - T)
I = 200 - 20i
NX = 200 - 50E
M/P = Y - 40i
G = 200
T = 200
M = 3000
P=3
i* = 5
b. Assume a floating exchange rate and constant expectations.
Calculate what happens to the exchange rate, the level of income,
net exports, and the money supply if the government increases its
spending by 50. Use...

Suppose that economy of Portugal is characterized by the
following C = 200 + 0.5 (Y - T) Represents the consumption function
I = 600 – 30 r represents the investment function G = 300
represents the public spending T = 300 represents the level of
taxation (m/p)d = y - 40 r represents the money demand function
(m/p)s = 1500 r represents the real money supply d Y represents the
global output Find the IS curve the LM curve...

An economy is described by the following equations:
C
= 1,500 + 0.9 (Y – T)
I
p
= 1000
G
= 1,500
NX
= 100
T
= 1,500
Y*
= 8,800
The multiplier for this economy is 10.
Find the effect on short-run equilibrium output of:
a. An increase in government purchases by 100 from 1,500 to
1,600.
Instruction: Enter your response as an integer
value.
Short-run equilibrium output will increase to .
b. A decrease in tax collections...

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