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- Given the equations of an economy: C= 10 + 0.75 Yd where C stands for consumption and Yd stands for disposable income T=0.2 Y where T stands for Tax and Y for income G=230, where G stands for Government expenditure I=280-6i where I stands for Investment and i for interest L=0.4Y-4i, where L stands for the demand for real balances M=800, where M stands for nominal money supply P=2, where P stands for the price level Calculate the budget surplus and If government spending were to increase by 10, what would be the change in the rate of interest, the level of investment and the level of income?Explain in words how and why the income and interest sensitivities of the demand for real balances affect the slope of the LM curve.1) The IS-LM Model a) In the IS/LM model explain what happens to equilibrium output and interest rate if governmentsimultaneously pursues expansionary fiscal policy and the central bank opts for a contractionarymonetary policy. Show with the help of a graph along with a very brief verbal explanation. b) Label the statements below as true or false and give a brief explanation for false statementsonly. i) For a given level of P (price), if M (nominal money) increases by 10%, M/P also increases by10% ii) A monetary expansion leads to a lower output and a higher interest rate. iii) Equilibrium in the financial market implies that an increase in income leads to a decrease ininterest rate making the LM curve downward sloping. c) Assume a model economy with the following parameters:C= 100 + 0.25 YD ; I= 100 + 0.5Y - 3000iG= 125 ; T= 100 ;(M/P)d = 6Y - 24000i ; (M/P)s = 4500Derive the IS and LM relation. 2) The short and medium run a) Suppose that the mark-up of goods prices over marginal…
- Consider following IS-LM model: C = 200 + 0.25 · YD I = 150 + 0. 25 · Y – 1, 000 · i G = 250 T = 200 D M = 2 · Y – 8, 000 · i M = 1,600 P e) Solve for the equilibrium values of C and I! f) Solve for the equilibrium values of Y, i, C and I, if the money suppl increases to 1,840! g) Solve for the equilibrium values of Y, i, C and I, if government spending increases to 400 (the money supply is 1,600)!What is the impact of monetary and fiscal policy if (a) money demand does not depend on income, LM curve is horizontal; and (b) If money demand is extremely sensitive to interest rate, LM curve is horizontal.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?
- The US Government is facing major budget deficit deciding between implementing fiscal and monetary policy to boost output back to potential output. In the presence of expectations, using the IS-LM model graph the effects on the US economy from a contractionary fiscal policy? What would happen if this change is perceived as permanent by investors? Graph and explain. What would happen if the government was perceived as wasteful? Graph and explain.Please consider the real balance demand below.ln m = α0 + α1 ln y + α2 ln Ra) What is the economic meaning of α1 and α2 ? Prove your claim for α1.b) Assume that α1 = 1.0 and α2 = -0.4. Interpret α1 and α2.c) Solve the real balance demand for R using the numerical values in (b) above.d) Consider R = r = 0.04 and y / m = 5 for the zero inflation rate. Assuming that the real interest rate r is constant and 4%, calculate the inflation rate for the nominal interest rate R = 25%.e) Using the values in (b) and (d) above, calculate the inflation welfare cost as a percentage of total output y.f) explain intuitively the economic logic behind the calculation method in (e) above.Instructions: Please read all questions carefully and make sure you understand the facts before you begin answering. Write legibly and be as concise as possible. 1. Using the ISLM model, show graphically, and explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change? 2. Explain the difference between Keynesian economics and Classical economics by mentioning the complete name of the economist who develops the theory/model. 3. Describe each of the components of the GNP equation and which one you feel can distort GNP the most. 4. With the topics discussed within Macroeconomics, which topic do you feel is most influential on our nation’s economy? Describe the topic and then use 5 bullet points to defend your position? 5. Draw the graph of the Keynesian cross model as a comparison of planned and realized expenditures. What is the intercept of the planned expenditure line?…
- Explain the IS LM model for reduced policy rate in goods and services market and finincal marketUsing the IS LM model, show how expansionary monetary and expansionary fiscal have same effect on output but opposite impact on interest rates. b. Derive the equations for IS and LM curves from the set of equations given below: C = 80+ 0.75Yd I = 300-200 i G is government expenditure G = 30 T = 30 where T= taxes Ms = 270 where Ms is money supply Md = 150+ 0.30Y – 300i Find the volume of investment at equilibrium . What would be the impact on investment if Money supply is increased to 300.With the help of an IS-LM diagram, explain the effects of an expected future tax increase on current output, the current interest rate, current aggregate spending. (It’s be better to explain with diagram, thank you!)
