You are given the following information regarding a hypothetical economy: Consumption function is C= 0.3+0.8(Y-T) Investment I=3.5- 50i G= 3 T= 2.5 The demand for real money is M/P=2+0.2Y-50i. The real stock of money is 3. Answer the following questions: а. Derive the IS Curve b. Derive the LM Curve с. What are the equilibrium equilibrium output and interest rate?

You are given the following information regarding a hypothetical economy: Consumption function is C= 0.3+0.8(Y-T) Investment I=3.5- 50i G= 3 T= 2.5 The demand for real money is M/P=2+0.2Y-50i. The real stock of money is 3. Answer the following questions: а. Derive the IS Curve b. Derive the LM Curve с. What are the equilibrium equilibrium output and interest rate?

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter10: Keynesian Macroeconomics And Economic Instability: A Critique Of The Self Regulating Economy

Section: Chapter Questions

Problem 7QP

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An economy is described by the following equations: C= 2,600+ 0.8(Y-T) - 10,000r IP = 2,000-10,000r G = 1,800 NX = 0 PAE = C+1²+ GANX T = 3,000, Where the definitions of each variables are the same as our lecture notes. The real interest rate, r, expressed as a decimal, is 0.10 (that is, 10 percent). a. Find a numerical equation relating planned aggregate expenditure to output. b. Solve for short-run equilibrium output. c. Show your result graphically using the Keynesian-cross diagram. d. Now, suppose that potential output Y* equals 12,000. What real interest rate should the Fed set to bring the economy to full employment? e. Recalculate question (d) for the case in which potential output Y* equals 9,000.
Consider 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.
In each of the following cases, determine whether the IScurve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.a. The real interest rate rises.b. The marginal propensity to consume declines.c. Financial frictions increase.d. Autonomous consumption decreases.e. Both taxes and government spending decrease by thesame amount.f. The sensitivity of net exports to changes in the realinterest rate decreases.g. The government provides tax incentives for researchand development programs for firms
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?
Consider the IS curve where consumption depends on the present discounted value of income. Suppose the parameters of the IS curve are: bbar_c = 0.5; abar = 0; bbar = 1; rbar = 2% and the real interest rate is initially R = 3%. A. Is the economy in its long-term equilibrium? Explain. B. Suppose the real interest rate decreases to 2 percent; what happens to the short-run equilibrium, holding everything else constant? C. What happens to the short-run equilibrium if abar increases to 5 percent, holding everything else constant?
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.
General Equilibrium is a situation in which all market in an economy are simultaneously in equilibrium (both the good market and the money market in equilibrium, as shown below). Now suppose the U.S. economy is now shown at the intersection of the IS and LM curves. Now President Joe Biden passed his Infrastructure bill. Please use graph to explain how such a bill may affect the economy in the long run and short run, in terms of price level, P, output Y and interest rate r. Please also add the AD-AS analysis with your argument.
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.…
Consider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption.b) It will result in an increase in investment but a decrease in government spending.c) It will lead to an increase in investment and private saving.d) It will decrease investment but increase in public saving.
2. In the IS-LM model, what is the effect of an increase in government purchases? Draw an IS-LM diagram to illustrate. In this question, it is not necessary to include the FE line. a) What is the effect on output and the real interest rate? b) What is the effect on investment spending? c) If the LM curve had been horizontal, explain how your answers to a and b would have been different.
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…
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.…