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In: Economics

IS-LM closed economy – SR The Economy of North Haverbrook is described by the following agents...

IS-LM closed economy – SR

The Economy of North Haverbrook is described by the following agents and characteristics.

consumers C = 50 + 0.85 (Y-T)

(taxes) T = 100

(government expenditures) G = 100

(investments) I = 500 – 50r

(money supply) M = 3,000

(price levels) P = 1

(money demand) L (r,Y) = Y – 10r

(potential output) Y* = 3200

The goods and services markets in equilibrium is described as: Y = AE, where AE = C + I + G, and money market is in equilibrium when M/P = L(r,Y).

[2 points each, except for h) 4 points]

  1. Find the aggregate expenditure function

  1. Find the IS curve

  1. Find the LM curve

  1. Find the equilibrium exchange rate and output (Y, r)

  1. Find the aggregate demand curve

  1. Find Private savings, Public Savings and National savings

  1. Do we have an expansionary gap or recessionary gap? What size?

  1. If fiscal policy is used (government expenditure: G), how much +/- change will be required to close the gap?

  1. If fiscal policy is not used, how will the gap close? (impact on prices and output – you can graph a diagram if it helps)

Solutions

Expert Solution


Rahul Sunny answered 6 months ago
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