Question

In: Economics

Consider the following economy: Planned consumption: ? = 900 + 0.5(? − ?) − 180? Planned...

Consider the following economy: Planned consumption: ? = 900 + 0.5(? − ?) − 180? Planned investment: ? = 950 − 180? Real money demand: ( ? ? ) ? = 0.5? − 180?

a. (2 pts) Suppose ? = 400, ? = 450, and ? = 9,750. Find an equation for the IS curve.

b. (2 pts) Find an equation for the LM curve.

c. (2 pts) Find an equation for the aggregate demand curve. Express the AD curve as ? being a function of ?. (Hint: Use the IS and LM equations to find a relationship between ? and ?.)

d. (5 pts) If the full employment output ? = 4,000, what are the equilibrium values for the level of aggregate prices, output, consumption, investment, and the real interest rate?

e. (2 pts) Suppose that the money supply falls to ? = 5,250. What is the equation for the AD now?

f. (5 pts) Repeat (d) given that money supply falls to 5,250

g. (3 pts) Explain what you find using the IS-LM diagram, and the LRAS curves drawn in the ? − ? space. Argue whether IS, LM shifted or not and why

PLEASE ONLY ANSWER E- F

Expert Solution

The IS curve would be where or or or or or or or .

The LM curve would be where or or or or .

The AD would be as or , and the equilibrium price would be as where or .

----------------------------------------------------------------------------------------------------------------------------

(e) For the new money supply, we have the new LM curve as or or or or or pr . The new AD would be where the new LM and IS interact, ie where or or or .

(f) The LRAS would be as . The new equilibrium price would be where the new AD interacts with the LRAS, ie where or or pr or .

The equilibrium output (which would be equal to the LRAS, ie Y*=4000) would be as or or pr .

For the IS curve be , the equilibrium real interest rate would be as or or or .

The equilibrium consumption would be as or or or .

The equilibrium investment would be as or or or .

(g) The graph is as below.

The IS curve remains unaffected. LM curve, yet affected, but does not shifts. The IS curve deals with real output Y and real interest rate r, and both doesn't change in either scenario, hence remains unaffected.

LM curve deals with r, Y and price level P. The LM curve is surely affected by the change in the money supply, but is the change in price level absorbs that and the LM remains the same as before, ie the shift in LM due to decrease in money supply is reversed by the proportionate decrease in price level.

Rahul Sunny answered 2 years ago

Problem 4 Consider the following economy: Consumption Expenditure 446,832 million Planned Investment Expenditure 346,877 million Government...

Problem 4 Consider the following economy: Consumption Expenditure 446,832 million Planned Investment Expenditure 346,877 million Government Expenditure 446,832 million Exports 402,443 million Imports 388,374 million Marginal Propensity to Save 0.3 Marginal Tax Rate 0.32 Autonomous Taxes 301,240 million Marginal Propensity to Import (nx) 0.04 (e) Calculate the marginal leakage rate. (0.5 mark) (f) Assume that the natural rate of output for this economy is estimated as $1,200,000 million. (i) Is this economy facing a recessionary or inflationary gap? (0.5 mark) (ii) Illustrate...

3. The components of planned aggregate spending in a certain economy are given by Consumption Function:...

3. The components of planned aggregate spending in a certain economy are given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r Planned Investment: I p = 400–3000r Government Revenue and Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the real interest rate (For example, r = 0.01 means that the real interest rate is 1 percent). (1) Find the level of public saving. (2) Suppose that the real...

Consider an economy with the following characteristics: · Consumption function is C = 200 + 0.8Y;...

Consider an economy with the following characteristics: · Consumption function is C = 200 + 0.8Y; · Planned investment: I = 50; · Government expenditure: G = 50; · Exports of the country: X = 20 · The import function: M = 10 + 0.1Y. · Assume there are no transfer payments and no autonomous taxes. All variables are in billions of dollars. C is consumption expenditure; Y is real GDP; G is government purchases of goods and services; I...

Consider the following equations that describe a closed economy with no government. Assume consumption is represented...

Consider the following equations that describe a closed economy with no government. Assume consumption is represented by the following: C = 200 + 0.9Y. Also assume that planned investment (I) equals 300. Obtain the saving function for this economy. What are the marginal propensity to save (MPS) and marginal propensity to consume (MPC)? Write the equation for the planned aggregate expenditure. Find the equilibrium level of output and calculate the level of consumption and saving that occurs at the equilibrium...

Centrally planned economy and a market economy

Distinguish between a centrally planned economy and a market economy.

Consider a hypothetical economy characterized by the following equations (all variables as defined in class). Consumption:...

Consider a hypothetical economy characterized by the following equations (all variables as defined in class). Consumption: C = 700 + 0.95Y Investment: I=500− 30i Government spending: G=50 Money demand: L(i,Y )=0.75Y − 30i Money supply: Ms/P=400 (a) What is the equation of the IS curve? (b) What is the equation for the LM curve? (c) Solve for the equilibrium values of income (Y) and interest rates (i). (d) Assume that the government engages in expansionary fiscal policy by increasing expenditure...

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...

Consider the Keynesian Model for the Open Economy with Government: Planned Expenditures: AE = C +...

Consider the Keynesian Model for the Open Economy with Government: Planned Expenditures: AE = C + I + G + X - IM Consumption: C = 435 + 0.72 (Y- T) Net Tax Revenue: T = 130 + 0.26 Y Gross Investment: I = 675 Government Expenditures: G = 540 Exports: X = 545 Imports: IM = 110 + 0.12 Y Potential Output: Yp = 3,550.742 Section 1: Model Questions Part 1. What is the slope of the AE curve? ...

Consider an economy where an agent produces a consumption good with labor.

Consider an economy where an agent produces a consumption good with labor. The agent has the following preferences: u(c, l) = √c+ α√l where c is consumption, I is leisure, and a is a parameter. An agent splits her time between labor and leisure such that n +l= 1 where n is how much she works. Prices for the consumption good is p and labor is w. The agent works at a competitive firm (i.e. zero-profit) which transforms labor using the technology y =F(N)...

Consider the following hypotheses: H0: μ ≥ 180 HA: μ < 180 A sample of 83...

Consider the following hypotheses: H0: μ ≥ 180 HA: μ < 180 A sample of 83 observations results in a sample mean of 175. The population standard deviation is known to be 21. (You may find it useful to reference the appropriate table: z table or t table) a-1. Calculate the value of the test statistic. (Negative value should be indicated by a minus sign. Round intermediate calculations to at least 4 decimal places and final answer to 2 decimal...