The consumption function of the economy of Macro-land is given by ? = 200 + 0.75(? − ?) The investment function is given by ? = 200 − 25? . Government purchases and taxes are both 100. (a) Find the equation of the IS curve (b) The money demand function in Macro-land is given by Md= ? − 100? The nominal money supply M is 1,000 and the price level is 2. Find the equation of the LM curve (c) Find the interest rate and income for which the goods and services and money markets are simultaneously in equilibrium.
The consumption function of the economy of Macro-land is given by
? = 200 + 0.75(? − ?)
The investment function is given by ? = 200 − 25? .
Government purchases and taxes are both 100.
(a) Find the equation of the IS curve
(b) The money demand function in Macro-land is given by
Md= ? − 100?
The nominal money supply M is 1,000 and the price level is 2. Find the equation of the
LM curve
(c) Find the interest rate and income for which the goods and services and money markets
are simultaneously in equilibrium.
(d) Suppose the government purchases are raised from 100 to 150. What are the new
equilibrium interest rate and income?
(e) Suppose that the money supply is raised from 1,000 to 1,200. What are the new
equilibrium interest rate and
(f) How will fiscal expansion in the country (Macro-land) affect national income,
employment, interest rate, price level and real money balance under the Keynesian
aggregate supply condition?
NB: Kindly answer all questions
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The intersection of the IS and LM curves shows the equilibrium point of interest rates and output when money markets and the real economy are in balance.
a. Equation for the IS curve:
The consumption function of the economy of macro land is
C= 200+0.75(Y-T)
Investment function I = 200-25r
Government purchases G= 100
Taxes T=100
Y=C+I+G
Y = 200+0.75Y-75+200-25r+100
Y = 425+0.75Y-25r
0.25Y =425-25r
Y= (425/0.25)- (25r/0.25)
Y = 1700-100r is the equation for IS curve.
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