Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) | = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 М — 2000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. d) If the government intends to pursue monetary policy instead of fiscal policy, how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism. e) Suppose that an economist suggests that the equilibrium in the money market should be described by the following equation: M = 37.6 + Y –- 93r P With all other behavioural equations as in part (a) (assume that taxation and money supply are at their original level of T = 100 and M = 2000) solve for the equilibrium values of the interest rate and output. Use a graph to show the difference between your result with the one you obtain in b) above. Given the new money market equation, compare the effectiveness of fiscal and monetary policy.
Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) | = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 М — 2000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate.
d) If the government intends to pursue monetary policy instead of fiscal policy, how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism.
e) Suppose that an economist suggests that the equilibrium in the money market should be described by the following equation: M = 37.6 + Y –- 93r P With all other behavioural equations as in part (a) (assume that taxation and money supply are at their original level of T = 100 and M = 2000) solve for the equilibrium values of the interest rate and output. Use a graph to show the difference between your result with the one you obtain in b) above.
Given the new money market equation, compare the effectiveness of fiscal and monetary policy.
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