(1) Suppose that the demand for real money balances depends on the interest rate, r, and ondisposable income Y - T; in other words, suppose that the correct way to write the LMequation isM/PL(r,Y-T).With this change to the IS- LM model, can you tell whether a tax cut increases or decreasesoutput in a closed economy? Illustrate graphically the short-run effects on interest rate andoutput. Be sure to label: i) the axes, ii) the curves, iii) the initial equilibrium values; iv) thedirection the curves shift; and v) the terminal equilibrium values.

Answered: Image /qna-images/answer/6cebf354-3723-4186-b81e-9e347514b4ac.jpg

Answered: (1) Suppose that the demand for real…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The following equations describe a certain economy C=200+0.75Yd consumption function I = 100-50r Investment function T = 60+0.2Y Tax function G = 200 Government expenditure X = 100 Exports M = 100 + 0.02Y Import function MS = 2000 Money supply MD = 0.3Y-10r Money demand Required: Derive the IS and LM equations. Caleulate the equilibrium Y, C, T, M and I. General equilibrium occurs when IS and LM curves intersect. Explain the conditions to be satisfied at this intersection, and explain the causes of d'sequilibrium.
Explain if, and why, you agree, or do not agree, with the following statement [when answering, assume that, in each time period, the economy is described by a static IS-LM model, with consumption and investment depending on contemporaneous variables only]:"In a closed economy wherke the central bank chooses the money supply, the prices of stocks at time t, €Qt, will unambiguously rise if, from time t onwards, government purchases of goods and services, G, go up".
answer c and d Suppose that the following system of equations describe the macroeconomy of a hypothetical country: Y= C(y)+I(i)+G : IS or goods market M/p=L(i,y) : LM or money market b) Taking money supply and government expenditure as exogenous and the price level as fixed, determine and provide economic intuition for the signs and magnitudes of the following multipliers dY/dG and di/dG c) For a simultaneous increase in both the interest elasticity of investment and interest elasticity demand for money parameters, determine the net effect on the values of the multipliers in part b). d) For a horizontal LM curve, determine the numerical values of your answers in part b) above if: Marginal propensity to consume=5/6 Tax rate=0.25 Interest elasticity of investment=5 Interest elasticity of demand for money=50 Income elasticity of demand for money=2 answer c and d only
conomics Consider a consumption function of C = 0.75 (Y – T). a) If government spending increases by $300 and there is a tax hike of $500 to fund thisincrease, according to the IS-LM model will the IS curve shift up or down and byhow much?b) Considering your shift in the IS curve from part a, how should the Federal Reserveadjust the money supply if they want to keep interest rates constant?
3-) Consider an economy with the following economic functions; cd=1000+ 0.45Y - 45000r - 0.5G Id = 500 22500r Md -0.5Y - 3000 P And other variables are ² = 0.04, G=250, Y = 500, and M = 4200. a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level. b) Suppose the money supply increases to 8400. Find the equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged)
Consider the following Keynesian economy Desired consumption: c" -220 + 0.6(Y - T)-200r Desired investment: 300 - 300r Taxes: T=20 + 0.2Y Government purchases: G= 152 Net exports: NX 150 -0.08Y -500r Money demand: L0.5Y -200r Money supply: M=936 Full-employment output: Y 1000 In this economy, the real interest rate does not deviate from the foreign interest rate. a. In the general equilibrium (that is, the long run), the value of output is 1000 , the real interest rate is 0.210, consumption is 646, investment is 237, net exports are -35, and the price level is 2.044 (Enter values rountled to three decimal places for the real interest rate and price level, and enter values rounded to integers for all other values.) b. Starting from full employment, govermment purchases are increased by 58, to 210. As a result of this change, in the short run, output becomes 1019. the real interest rate becomes 0.257, the consumption becomes 640, investment becomes 223, and net exports become - 60 (Enter…
Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P=A×MP=A×M • P=Price LevelP=Price Level • M=Money SupplyM=Money Supply • A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level?
2. Consider the following IS-LM model: C = 200+ 0.25Yd I = 150+ 0.25Y 1000i G = 250 T = 200 b. d = 2Y - 8000i MS 3200 and P = 2 a. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I and G. M Now that the money supply increases to suppose 1,840. Solve for equilibrium Y, į c, and T, and describe in words the effects of an expansionary monetary policy on the equilibrium Y, i, c, and T. = c. Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Solve for the new equilibrium Y, į, and C. Summarize the effects of an expansionary fiscal policy on Y, i, and C.
The following equations relate to a certain economy, peruse them and answer thefollowing questions.T = 0.75Y (tax rate)L= Y - 100r (Real money demand)M = 300 (Read money supply)C = 200 + 0.25Y d (Consumption function)I = 20 - 10r (Investment function)G = 30 (government purchases) i) Derive equations fro IS and LM curvesii) Determine the rand y pair at which the two markets are clearing iii) Compute the values of C, I and L.
Consider two interest rate levels, and is, and the corresponding total demand curves Z, and Z, in the usual graph. Hint: recall that the usual graph plots the demand curves with demand for goods on the vertical axis and production on the horizontal axis Question: if firms become more sensitive to interest rates in their investment decisions, then..... Select one: a Z, and Z₂ will shift but remain at the same distance. b. Z and Z₂ will shift down by the same amount c. Z and Z₂ will be further apart d.Z, and Z₂ will be nearer
Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy.
In a particular economy the real money demand function is Md/P = 300 +0.1Y - 10000i Assume that M = 6000, P = 2, and πe = 0.02. a. What is the real interest rate, r, that clears the asset market when Y = 8000? When Y = 9000? Graph the LM curve. b. Repeat Part (a) for M = 6600. How does the LM curve in this case compare with the LM curve in Part (a)? c. Use M = 6000 again and repeat Part (a) for πe = 0.03. Compare the LM curve in this case with the one in Part (a).

SEE MORE QUESTIONS

Recommended textbooks for you

ENGR.ECONOMIC ANALYSIS

Economics

ISBN:

9780190931919

Author:

NEWNAN

Publisher:

Oxford University Press

Principles of Economics (12th Edition)

Economics

ISBN:

9780134078779

Author:

Karl E. Case, Ray C. Fair, Sharon E. Oster

Publisher:

PEARSON

Engineering Economy (17th Edition)

Economics

ISBN:

9780134870069

Author:

William G. Sullivan, Elin M. Wicks, C. Patrick Koelling

Publisher:

PEARSON

ENGR.ECONOMIC ANALYSIS

Economics

ISBN:

9780190931919

Author:

NEWNAN

Publisher:

Oxford University Press

Principles of Economics (12th Edition)

Economics

ISBN:

9780134078779

Author:

Karl E. Case, Ray C. Fair, Sharon E. Oster

Publisher:

PEARSON

Engineering Economy (17th Edition)

Economics

ISBN:

9780134870069

Author:

William G. Sullivan, Elin M. Wicks, C. Patrick Koelling

Publisher:

PEARSON

Principles of Economics (MindTap Course List)

Economics

ISBN:

9781305585126

Author:

N. Gregory Mankiw

Publisher:

Cengage Learning

Managerial Economics: A Problem Solving Approach

Economics

ISBN:

9781337106665

Author:

Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:

Cengage Learning

Managerial Economics & Business Strategy (Mcgraw-…

Economics

ISBN:

9781259290619

Author:

Michael Baye, Jeff Prince

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS