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]

Find the aggregate expenditure function

Find the IS curve

Find the LM curve

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

Find the aggregate demand curve

Find Private savings, Public Savings and National savings

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

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

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 2 weeks ago

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