Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 15, Problem 2PA
To determine
The long-run equilibrium under the
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The commodity market for a simple two-sector economy is in equilibrium when Y = C + I. The money market is in equilibrium when the supply of money (Ms) equals the demand for money (Md), which in turn is composed of the transaction-precautionary demand for money (Mt) and the speculative demand for money (Mz). Assume a two-sector economy where C = 5 + 0.8Y, I = 100 - 75i, Ms = 250, Mt= 0.3Y, and Mz = 50 - 150i. , find the IS and LM and equliprium in commodity and money markets.
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The commodity market for a simple economy is in
equilibrium and when Y = C + I + G. The money
market is in equilibrium when the supply of money
(M) equals Demand for money (Md). Demand for
money composes of transaction-precautionary
demand for money (Mt) and the speculative
demand for money (Ms). Assume the economy is
characterised by the following information; C =
4800 + 0.8Yd T= 100, I = 1900 – 75i, G = 4000, M
= 5000, Mt = 0.3Yd Ms = 100 – 15i a) Derive an
expression to show the IS function b) Derive the
LM function c) What values of Income and Interest
rate provides for both the goods market and
money market equilibrium in this economy d)
Sketch the IS and LM curves for this economy. e)
Outline four factors that cause a shift in the IS
curve.
Planned aggregate expenditure in the fictitious country "Alpha" depends on real GDP and the real interest rate according to the
following equation:
PAE= 2,000 + 0.75 Y – 1,000r.
The Alpha Bank, the country's central bank, has announced that it will set the real interest rate according to the policy reaction
function found the the first two columns of the table below.
For the rates of inflation given, find autonomous expenditure and short-run equilibrium output in Alpha.
Autonomous
Inflation rate, n
Real interest rate, r
expenditure
Equilibrium output
e.00
0.01
0.01
0.02
0.02
0.03
0.03
0.04
0.04
0.05
Using the data above, graph the AD curve.
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