The following equations describe a certain economy C=200+0.75Yd consumption function I = 100-50r Investment function T = 60+0.2Y Tax function G = 200 Government expenditure X = 100 Exports M = 100 + 0.02Y Import function MS = 2000 Money supply MD = 0.3Y-10r Money demand Required
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The following equations describe a certain economy
C=200+0.75Yd consumption function
I = 100-50r Investment function
T = 60+0.2Y Tax function
G = 200 Government expenditure
X = 100 Exports
M = 100 + 0.02Y Import function
MS = 2000 Money supply
MD = 0.3Y-10r Money demand Required:
Derive the IS and LM equations.
Caleulate the equilibrium Y, C, T, M and I.
General equilibrium occurs when IS and LM
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- QUESTION TWOConsider the consumption function is given byC = 200 + 0.75YDWhere YD is disposable income Suppose that the economy faces an investment function of the formI = 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 2Required:(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 curveshift? (iv) If the money supply increases by 200. How much does the LM curve shift?The consumption function is given by: C = 200+0.75 (Y-T). The investment function is I = 200-25r. G =100 T=100 1. The money demand function is Md = Y-100r. The Money supply M is 1000 and price is 2. Derive the LM equation.2. Find the equilibrium interest r and the equilibrium level of income Y, investment and consumption3. Suppose that the government purchases (G) raised from 100 to 150. How much does the IS Curve shift? What are the new equilibrium interest r and level of income, y? If there is no crowding out effect, what is the full multiplier effect of the change in G?Consider the economy of Banana.a. The consumption function is given by C = 200 + 0.75(Y − T), The investment functionis I = 200 − 25r. Government purchases and taxes are both 100. For this economy, graphthe IS curve for r ranging from 0 to 5.b. The money demand function in a Banana is (M/P)d = Y − 100r. The money supply M is1,000 and the price level P is 2. For this economy, graph the LM curve for r ranging from0 to 5.c. Find the equilibrium interest rate r and the equilibrium level of income Y.d. Suppose that government purchases are raised from 100 to 150. How much does the IScurve shift? What are the new equilibrium interest rate and level of income?e. Suppose instead that the money supply is raised from 1,000 to 1,200. How much doesthe LM curve shift? What are the new equilibrium interest rate and level of income?f. With the initial values for monetary and fiscal policy, suppose that the price level risesfrom 2 to 4. What are the new equilibrium interest rate and level of income?g.…
- Consider a small open economy given by the following: Consumption Function: Ct = 17.2 + 0.7(Yd)t Investment Function: It = 24 -100rt Real Demand for Money: Lt = 6Yt-1400r Net Exports Schedule: NXt = 8 – 4et Government Spending: G0 = 36 Tax Collections: T0 = 36 World Interest Rate: r0 = 0.15 Price Level: P0 = 4 Domestic Money Supply: M0 = 2520 Assume further that the economy is currently at the long-run equilibrium. QUESTIONS: Find an expression for the IS curve Find an expression for the LM curve Graph the situation of this economy in the IS-LM and IS*-LM* diagrams Find the equilibrium level of output, consumption, investment, net exports, interest rates and exchange rate. Suppose that the Government increases Government spending to 40. What would be the new equilibrium level of ouput, exchange rate and interest rate? Graph this new situation and explain any adjustments Suppose now that this economy follows a fixed exchange rate regime and that the target of the Central Bank is…Using 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 300.2) The following describes a certain economy C = 400 + 0.75Id consumption function I = 200 – 100r investment function T = 70 + 0.2Y Tax Function G = 100 Government Expenditure X = 10 Exports M = 150 + 0.06Y Import Function Ms = 4000 Money Supply M^D = 0.2Y – 10r Money Demand Required a) Derive the IS and LM equation b) Calculate the equilibrium Y, C, T, M, and I
- Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. Based on this information, answer the following questions: b) What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy. (***explanation of crowding out where the concept is clearly defined and implications for the macroeconomy are fully discussed) c) If the MPC rises to 0.8 and also the sensitivity of real money demand to changes in the income rises well, use the IS-LM model to illustrate the impact of expansionary fiscal policy. Label the initial point prior to the fiscal policy as A and the new point following the expansionary policy as B. (***Correct fully labeled IS-LM Model shown including adjustment from the diagram in a) and correct position of points A and B.)Consumption function C=250+0.6(Y-T) Investment I=100-20r Money demand function (M/P)=Y-20r a. Government purchases and taxes are both 100. In the accompanying diagram, graph the IS curve for r ranging from 0 to 8 by dragging and dropping the end points to the correct locations. b. The money supply M is 2,875 and the price level P is 5. In the accompanying diagram, graph the LM curve for r ranging from 0 to 8 by dragging and dropping the end points to the correct locations. c. Find the equilibrium interest rate, r, and the equilibrium level of income Y.Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as: C = 500 + 0.75(Y - T)I = 1000 - 300?G = 1000T = 1200MD = 0.5Y - 200rM = 5000P = 2 (a) Write down the equations for the IS curve and LM curve. Show your workings. (b) Solve for the short-run equilibrium output and interest rate. (c) Suppose government purchases falls, with ΔG=-175. (i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.) (ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer. (e) Suppose the price level falls. Using an appropriate IS-LM diagram, illustrate the short-run impact of the fall in price level on the equilibrium interest rate and output. No written…
- The Based on the following equations Saving (S)= 0.2Y Investment(1)= - 30r + 740, Money Supply(Ms)= 4000 Transaction Demand for Money(L 1) = 0.15Y Speculative demand for money (L2) =-20r+3825. Find : The simple investment multiplier isConsider the following IS–LM model: C = 100 + .25YD I = 50 + .25Y - 1000i G = 150 T = 100 (M/P) d = 2Y - 8000i (M/P)s = 1000 a. Derive the IS relation b. Derive the LM relation c. Solve for equilibrium real output. d. Solve for the equilibrium interest rate e. Solve for the equilibrium values of C and I f. now suppose that the money supply increases to M/P = 1010. Solve for T, f. suppose that government spending increases to G = 155 What is the value of money supply? g. From what we studied, which policy, expansionary fiscal policy or expansionary monetary policy will undoubtedly increase investment.The following equations describe a certain economy C = 400 + 0 . 75 Y d → consumption function I = 200 − 100 r → Investment function T = 70 + 0 . 2 Y → Tax function G = 100 → Government expenditure X = 10 → Exports M = 150 + 0 . 06 Y → Import function MS = 4000 → Money supply MD = 0 . 2 Y − 10 r → Money demand Required Derive the IS and LM equations for three and four sector economies separately. Calculate the equilibrium Y, r, C, T, M and I for three and four sector economies separately.