a) consider the following IS–LM model: C = c1(Y - T) I = b1Y - b2i M/P = d1Y - d2i Solve for equilibrium output. Assume c1 + b1 < 1. b) Solve for the equilibrium interest rate. (Hint: Use the LM relation.) c) Solve for investment.
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a) consider the following IS–LM model:
C = c1(Y - T)
I = b1Y - b2i
M/P = d1Y - d2i
Solve for equilibrium output. Assume c1 + b1 < 1.
b) Solve for the equilibrium interest rate. (Hint: Use the LM relation.)
c) Solve for investment.
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- Suppose in a closed economy, an unexpected pandemic discourages household consumption.i. Use the IS-LM model to explain its effects on interest rate, investmentand output level in the short run.Assume that a closed economy finds that households have become wealthier. Which one of the following options correctly describes the effects of this increase in wealth on the equilibrium interest rate and level of output in the IS-LM model? (a) Equilibrium output and income will decrease as the interest rate increases; (b) Equilibrium output and income levels will increase and the interest rate will remained unchanged; (c) Equilibrium output and income will decrease but the interest rate will remain unchanged; (d) Equilibrium output and income will increase as the interest rate decreases.Which one of the following statements is true? In the pre-Keynesian era, prices were assumed not to fully adjust. In the Keynesian model diagram, prices are fixed. GDP is a value of goods and services domestically produced in a country at a given point in time. Say's Law says that demand creates its own production. In the IS/LM model, the interest rate is a function of investment.
- According to the IS–LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances?a. The central bank increases the money supply.b. The government increases government purchases.c. The government increases taxes.Based on the extended Mundell-Fleming model, show your understanding of how the PB curve is formed. What is the meaning of equilibrium of the model (IS, LM and PB intersect at one point)?Do you remember the Harrod-Domar model? Derive it and apply it to a numerical case where d=4%, s=35%, and gY=8% last year. If s is expected to rise to 45% next year, what will happen to gY?
- Within the IS-LM curve model, if the government cut taxes at the same time that there was an autonomous increase in investment demand then a. income and the interest rate would rise. b. the interest rate would rise but the effect on income is uncertain. c. income would rise and the interest rate would fall. d. income would rise but the effect on the interest rate is uncertain.Use an ISLM model to analyse the effects of an increase in government expenditures on the interest rate and GDP,(i) in the case where the IS curve is quite flat and the LM curve is quite step,I have to analyze, using the IS-LM model, the macroeconomiceffects of an increase in savings in the short term and its implications for long-term growth. Specifically, I have to suppose that households (consumers) lose confidence and start saving more for any level of disposable income. In terms of total savings and, therefore, of potential long-term growth, is a flat LM curve or a positive sloping LM curve better, in which investment was assumed to be exogenous?
- Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $200 in the first period and $200 in the second period. Jill earns nothing in the first period and $410 in the second period. Both of them can borrow or lend at the interest rate r. a. You observe both Jack and Jill consuming $200 in the first period and $200 in the second period. What is the interest rate r? b. Suppose the interest rate increases. What will happen to Jack’s consumption in the first period? Is Jack better off or worse off than before the interest rate rise? c. What will happen to Jill’s consumption in the first period when the interest rate increases? Is Jill better off or worse off than before the interest rate increase?Assume a model economy with the following parameters: C=300+0.25 Yd I=250+0.5Y-2500i G=350 T=300 (M/P)d= 4Y-16,000i (M/P)s= 880 Derive the IS and LM relations and solve for equilibrium real output and equilibrium interest rate.In the IS/LM model, the IS curve maps interest rates and saving maps spending and income maps expenditure and money supply maps prices and output maps output and interest rates