1. Assume that Jamaica's economy is described as follows: • Full Employment Output Y = 2,000 • Government Spending G = 100 • Desired Consumption Cd=500 + 0.5(Y - T)- 50r • Desired Investment Id= 460 - 50r %3D • Real Money Demand L = 0.5Y - 500i • Nominal Money Supply M = 4700 • Expected Inflation r = 0.02 %3D (a) Assuming that the government of Jamaica always rûns a balanced budget, use the classical IS-LM model to find the equilibrium values of r, C, I and P. Please note that in the classical model, equilibrium output is always equal to the full employment level of output. Note also, that in equilibrium the goods market, the labor market, and the asset market must be in equilibrium. (b) Suppose the nominal money supply rises to 5,640, find r, I and P. Is money neutral? As before, your answers must be based on the classical approach i.e. prices adjust quickly.

1. Assume that Jamaica's economy is described as follows: • Full Employment Output Y = 2,000 • Government Spending G = 100 • Desired Consumption Cd=500 + 0.5(Y - T)- 50r • Desired Investment Id= 460 - 50r %3D • Real Money Demand L = 0.5Y - 500i • Nominal Money Supply M = 4700 • Expected Inflation r = 0.02 %3D (a) Assuming that the government of Jamaica always rûns a balanced budget, use the classical IS-LM model to find the equilibrium values of r, C, I and P. Please note that in the classical model, equilibrium output is always equal to the full employment level of output. Note also, that in equilibrium the goods market, the labor market, and the asset market must be in equilibrium. (b) Suppose the nominal money supply rises to 5,640, find r, I and P. Is money neutral? As before, your answers must be based on the classical approach i.e. prices adjust quickly.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: Money Growth And Inflation

Section: Chapter Questions

Problem 1PA

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