b. The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output. c. If government spending and taxes increase by the same amount, the IS curve does not shift. d. With a horizontal LM curve, the amount of money in the economy is constant along the LM curve.
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- 2. In the IS-LM model, what is the effect of an increase in government purchases? Draw an IS-LM diagram to illustrate. In this question, it is not necessary to include the FE line. a) What is the effect on output and the real interest rate? b) What is the effect on investment spending? c) If the LM curve had been horizontal, explain how your answers to a and b would have been different.Consider an economy with the following features: Consumption, C = 130 + 0.5Yd Income tax, T = 20 + 0.2Y Investment, I = 200 – 600r Government expenditure, G = 112 Real money demand, Md/P = 50 + 0.5Y – 600r Nominal money supply, Ms = 600 Price level, P = 2 where Yd stands for disposable income, and r for the rate of interest. Derive the IS and LM equations. Calculate the equilibrium levels of income and rate of interest.An economy is described by the following equations: C= 2,600+ 0.8(Y-T) - 10,000r IP = 2,000-10,000r G = 1,800 NX = 0 PAE = C+1²+ GANX T = 3,000, Where the definitions of each variables are the same as our lecture notes. The real interest rate, r, expressed as a decimal, is 0.10 (that is, 10 percent). a. Find a numerical equation relating planned aggregate expenditure to output. b. Solve for short-run equilibrium output. c. Show your result graphically using the Keynesian-cross diagram. d. Now, suppose that potential output Y* equals 12,000. What real interest rate should the Fed set to bring the economy to full employment? e. Recalculate question (d) for the case in which potential output Y* equals 9,000.
- An economy is described by the following set of equations: C = 2,600 + 0.8(Y – T) – 5,000r, I = 3,000 – 15,000r, G = 800, X = M = 0, T = 1,000 + 0.3Y. The real interest rate, expressed as a decimal, is 0.10 (that is, 10 percent). Suppose the flow of GDP consistent with full employment is 10,000. What real interest rate would achieve full employment?3 Explain how any technological advancement (increase in our A from production function) could affect investment, aggregate demand and income. Please show your answer by using graphs, models and explaining thoroughly.1- If government expenditure (∆G) is increased by AED 400, and tax (∆T) has also increased by AED 400, Marginal propensity to save is given as 0.25, what would the increase in National Income (∆Y)? 200 300 400 500 2- For an economy, the central bank has increased the money supply, what would happen to LM curve? It will shift to right It will shift to left It will not shift None of the options are correct 3- Which of the following sequence of events follows an contractionary fiscal policy? Increase in government expenditure and tax Decrease in tax and government spending Decrease in government expenditure and increase in ta Increase in government spending and decrease in Tax 4- Suppose for an economy following information is given. Consumption (C) = 40+0.75(Yd), Tax (T) = 80 Million AED ; I= 140-10r; Government spending (G) =100; Money demand = 0.2Y -5r ; Money supply = 85 million AED. a. Compute the equilibrium Income Y and rate of Interest (r) ? b. Suppose…
- Consider the economy of XYZ, has the following indicators in the table below:Ct = 0.7Yt̅Gt = 0.2Yt̅EXt = 0.20Yt̅IMt = 0.25Yt̅It = 0.30 − 2.0(Rt − 1.2)Yt̅A. Derive the IS equation. Explain why the IS curve has downward slope.B. Estimate the short-run output when real interest rate equals to 2 percent.C. Calculate the value of multiplier and interpret the result.D. Suppose the government increases the expenditure such as:Gt = 0.3Yt̅Show the impact on IS curve in graphically, and calculate the government expenditure multiplier.How much short-run output change? Explain the reason.19. In the short-run macro model, if the MPC equals 0.9 and investment spending rises by P200 billion, then equilibrium GDP will rise by a. P20 billion b. P180 billion c. P90 billion d. P1,000 billion e. P2,000 billionSuppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…
- Question Consider an economy described by the following equations: Y = C+I+G C = 100+0.75 (Y-T) I = 500-50r G = 125 T = 100 where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP would be 2,000. What is the marginal propensity to consume in this economy? Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level? Assuming no change in monetary policy, what change in government purchases would restore full employment? Assuming no change in fiscal policy, what change in the interest rate would restore full employment?Given the following information: C = Ca + 0.8Yd Ip = 1900 - 40r G = 1800 NX = 700 - 0.14Y T = 200 + 0.20 Y Ca = 260 - 10r Md/P = 0.25Y - 25r Ms/P = 2000 Find: 1. The equilibrium level of interest rate and output. 2. If Government expenditure increased by 100, find the new equilibrium level of interest rate and outputQ-1 The following table shows income and consumption: Calculate: A- Saving (S), B- Marginal propensity to consume (MPC), C-Marginal propensity to save (MPS), D- Average propensity to consume (APC) E- Average propensity to save (APS). Q-2 Compute the (a) Number of unemployed, (b) Unemployment-rate, (c) Population, and (d) Labor force participation rate, using this data: Number of employed = 1800 million Not in labour force =730 million Number of Labour force =2500 million Q-3 Discuss how to control or reduce the Inflation and Unemployment.
