Consider the following closed Keynesian economy: Desired consumption and investment are given by: Cd = 200+0.8(Y...

Consider the following closed Keynesian economy:

Desired consumption and investment are given by:
Cd = 200+0.8(Y −T)−500r

Id = 200 − 500r. Taxes and government expenditures are given by

The real money demand is

T = 20+0.25Y G = G=196.

Md
P = 0.5Y − 250(r + πe).

The money supply M = 9890 and the expected inflation πe = 0.10.
(a) Derive the equations for the IS and LM curves and show them on a (Y, r) graph.

(b) If the full-employment output is Y = 1000, what are the equilibrium values of r, P, C and I?

(c) Suppose there is a surprise increase in money supply, M to 12,650, what will be the short-run equilibrium values of Y, r, C and I? What will happen in the long-run? [Hint: Prices are sticky in the short–run (Keynesian)]

(d) If, after the increase in M the government increases its expenditure, what will be your predictions for Y,r,P,C and I? Be specific. [Do not solve for any variable.] Illustrate this on a diagram.

Solutions

Expert Solution

Rahul Sunny answered 2 months ago

Next > < Previous

Related Solutions

In a closed economy, given the following: The consumption function C = 0.8(1 – 0.25) Y...

In a closed economy, given the following: The consumption function C = 0.8(1 – 0.25) Y + 12 The average tax rate t = 25% The level of private investment I = 26 The level of government spending G = 14 Where Y is the national income. Calculate the equilibrium level of income and output in the economy. Calculate the expenditure multiplier and show the effect of an increase in government spending and an increase in private investment. Given the...

Suppose desired consumption and desired investment are Cd = 300 + 0.75(Y − T) − 300r T = 100 + 0.2Y Id = 200 − 200r

Suppose desired consumption and desired investment are Cd = 300 + 0.75(Y − T) − 300r T = 100 + 0.2Y Id = 200 − 200r G is the level of government purchases and G=600 Money demand is Md P = 0.5Y − 500(r + πe ) where the expected rate of inflation, πe , is 0.05. The nominal supply of money M = 133,200. Suppose the full employment output is 2500 and the price level in the short run...

Consider the following economy (with ﬂexible exchange rate system): • Desired consumption: Cd = 300 +...

Consider the following economy (with ﬂexible exchange rate system): • Desired consumption: Cd = 300 + 0.5Y −2000r • Desired investment: Id = 200−3000r • Government purchases: G = 100 • Net export: NX = 350−0.1Y −0.5e • Real exchange rate: e = 20 + 1000r • Full employment: ¯ Y = 900. • Nominal money stock: M = 4354 • Real money demand: L = 0.5Y −200r (f) Using the IS-LM-FE model, evaluate the eﬀects of a rise in...

Desired consumption is Cd = 20 + 0.5Y – 0.1r and desired investment is Id =...

Desired consumption is Cd = 20 + 0.5Y – 0.1r and desired investment is Id = 30 – 1.5r. G is 15 and Y is 100. Real money demand is Md/P = 5 + Y – 0.3i. Provide economic reasons to interpret: (a) the consumption function with respect to its components. the investment function with respect to its components.

Consider the following Keynesian economy. Consumption function: Ct = 20 + 0.7(Y-T) Investment Function: It =...

Consider the following Keynesian economy. Consumption function: Ct = 20 + 0.7(Y-T) Investment Function: It = 42 −100r Government Spending: Gt = 50 Tax Collections: Tt = 50 Real Money Demand Function: (Mt/Pt) = 6Yt − 2000Rt Money Supply: = Mt = 2800 Price Level: Pt = 2 i. Derive the equation for the IS curve expressing r as a function of Y only. For interest rates ranging from 0-8, graph the IS curve. ii. Derive the equation for the...

Suppose that desired consumption and desired investment are given as: C = c1 + cY (Y...

Suppose that desired consumption and desired investment are given as: C = c1 + cY (Y − T ) − cr r I = i1 − irr G = G0 T = τ1 + τ Y (a) Derive the equation for IS curve and draw its graph assuming c1 = 200 i1 =200 G=196 cY = 0.8 ir =500 τ1 =20 cr = 500 τ =0.25 (b) What would happen to the IS curve when lump-sum taxes, τ1, increases? (c)...

Question 1. In a closed economy, the consumption function is given by C = 200 +...

Question 1. In a closed economy, the consumption function is given by C = 200 + 0.75(Y-T). The investment function is I = 200 – 25r. Government purchases and taxes are both 100. The money demand function in the economy is (M/P)d = Y – 100r. The money supply M is 1,000 and the price level P is 2. a. Derive the equations of IS and LM curves. b. Find the equilibrium interest rate r and the equilibrium level of...

In the Keynesian cross model, assume that the consumption function is given by C=120+0.8(Y-T)

solve the following:a. In the Keynesian cross model, assume that the consumption function is given by C=120+0.8(Y-T). Planned investment is 200; government purchases and taxes are both 400. Y, C, I G&T are all in billions. i Graph planned expenditure as a function of income. ii. What is equilibrium income? iii. If government purchases increase to 420, what is the new equilibrium income? What is the multiplier for government purchases? iv. What level of government purchases is needed to achieve an income of 2,400? (Taxes remain...

(b) Consider an economy where the consumption function is given by ? = 500 + 0.8(?...

(b) Consider an economy where the consumption function is given by ? = 500 + 0.8(? − ?). Investment is given by 2000 − 100? (where ? is the real interest rate), government spending is 5000, taxes are equal to 4000. Exports are 1000, while imports are given by ?? = 0.2?. (i) Suppose that the real interest rate is ? = 5. Calculate the equilibrium level of real GDP for this economy. Now suppose that the Fed decides to...

Assume that GDP (Y ) is 5,000 in a closed economy. Consumption (C) is given by...

Assume that GDP (Y ) is 5,000 in a closed economy. Consumption (C) is given by the equation C = 1,200+0.3(Y −T)−50r, where r is the real interest rate, in percent. Investment (I) is given by the equation I = 1, 500 − 50r. Taxes (T ) are 1,000, and government spending (G) is 1,500. (a) What are the equilibrium values of C, I, and r? (b) What are the values of private saving, public saving, and national saving? (...

Subjects