Consider a closed economy where the goods and money markets are described by the following relationships:C = 200 + 0.9(Y – T)| = 400 – 15rM= 200 + Y – 100rPG = 150T = 100M = 2000P = 2Where C is planned consumption, I is planned investment spending, Tis government tax revenues, G isgovernment purchases, M is the money supply, P is the price level and r is the interest rate. a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the tworelationships.b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point).Compute also the level of consumption and investment spending in equilibrium and check whether the actuallevel of spending matches the equilibrium level of output.c) The government reduces taxation to T=50 in order to boost economic activity. Assume no changes in thevalues of all the other variables.1.What is the immediate increase in income before the economy adjusts to its new equilibrium?What are the economy's equilibrium level of output Y and interest rate following the cut in taxation?Compute the equilibrium level of consumption and investment spending. With the help of the IS/LMgraph, carefully explain what happens to the economy following the cut in taxation.2.

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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 3 2000 P = 2 Where Cis 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.

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 3 2000 P = 2 Where Cis 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.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 2QP

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In a small closed economy, its aggregate demand and output are given as the equations below, Y = C + I + G; national output or GDP. C = 100 + 0.5(Y-T); consumption, marginal propensity to consume MPC = 0.5. I = 150 – 10*r; investment is a negative function of real interest rate (r as %). (M/P)d = Y – 20*r; real money demand which is adjusted by price level (inflation). G = 200; as government spending. T = 200; as tax. M = 2,400; as money supply. P = 4; the price level. (1) With the equations above, try to derive the IS curve. Tip: recall IS curve represent the relation between national output (Y) and real interest rate (r) in goods market. To derive IS curve, you need to put all components of Y together and find its connection with r. (2) Use the same equations, now try to derive the LM curve. Tip: recall LM curve represent the relation between national output (Y) and real interest rate (r) in money market. So to derive LM curve, you need to consider money supply and demand.…
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