QUESTION TWO Consider the consumption function is given by C = 200 + 0.75YD Where YD is disposable income Suppose that the economy faces an investment function of the form I = 200 – 25r. Suppose further that G =T = 100 and the money demand function takes the form (M/P) = Y – 100r. The money supply M is 1,000 and Price level P is 2 Required: (i) Formulate the IS equation and the LM equation. (ii) Find the equilibrium interest rate and the equilibrium level of income. (iii) If government expenditure increases by 50, by how much does the IS curve shift?

QUESTION TWO Consider the consumption function is given by C = 200 + 0.75YD Where YD is disposable income Suppose that the economy faces an investment function of the form I = 200 – 25r. Suppose further that G =T = 100 and the money demand function takes the form (M/P) = Y – 100r. The money supply M is 1,000 and Price level P is 2 Required: (i) Formulate the IS equation and the LM equation. (ii) Find the equilibrium interest rate and the equilibrium level of income. (iii) If government expenditure increases by 50, by how much does the IS curve shift?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter8: Aggregate Demand And The Powerful Consumer

Section: Chapter Questions

Problem 8DQ

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