Assume the following IS-LM model: expenditure sector: money sector: AD = C + I + G...

Assume the following IS-LM model: expenditure sector: money sector: AD = C + I + G + NX

I = 300 - 20i

Ms = 700

C = 100 + (4/5)YD

G = 120 P = 2

YD = Y - TA

NX = -20

md = (1/3)Y + 200 - 10i

TA = (1/4)Y

a. Derive the equilibrium values of consumption (C) and money demand (md).

b. How much investment (I) will be crowded out if the government increases its purchases by (delta)G = 160 and nominal money supply (M) remains unchanged?

c. By how much will the equilibrium level of income (Y) and the interest rate (i) change, if there is an increase in government purchases by increasing nominal money supply to Ms = 1,100

Expert Solution

Rahul Sunny answered 2 years ago

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