Question

In: Economics

Consider a closed economy. The goods market is represented by the following equations: C = 160...

Consider a closed economy. The goods market is represented by the following equations:

C = 160 + 0.6YD
I = 100 + 0.2Y – 500i

T = 100
G = 100
YD = Y - T

1. Derive the IS equation from the equilibrium position Y = Z ≡ C + I + G and draw the IS curve on the graph.

In the money market, the real money demand is (M d/P) = Y – 1,500i; and the real money supply is (Ms/P) = 600.

2. Derive the LM relation and draw the LM curve on the graph where you draw the IS curve.

3. Solve for the equilibrium output Y and equilibrium interest rate i when both goods market and money market are at the equilibrium. Identify this equilibrium point on the graph in part (1).

4. Suppose now the government spending (G) increases from 100 to 200.
On the IS-LM graph in part (1) illustrate the effect of this increase in government spending on the IS or LM curve and mark the new equilibrium output Y and interest rate i.

5. Following this increase in government spending, how much will be the new equilibrium output Y and interest rate i?

6. How much is the multiplier of government spending?

7. Following the government spending increase, does the equilibrium investment I decrease or increase?

8. Suppose at the same time that the government spending increases, FED would use the monetary policy tool to accommodate such an expansionary fiscal policy to keep the equilibrium interest rate unchanged. Under this circumstance, how much would be the new equilibrium output (Y)? How much is the ‘multiplier’ of the government spending in this case?

9. In practice, how does FED achieve such an accommodation policy as mentioned in part (9). Illustrate the effect of this policy on an IS-LM graph. As a result, how much does the real money supply (Ms/P) need to increase to remain the equilibrium interest rate unchanged when the government spending increases?

Solutions

Expert Solution

Pages attached below from 1 to 8 arranged in order show the solution-


Related Solutions

Consider a closed economy. The goods market is represented by the following equations: C = 160...
Consider a closed economy. The goods market is represented by the following equations: C = 160 + 0.6YD I = 100 + 0.2Y – 500i T = 100 G = 100 YD = Y - T 1. Derive the IS equation from the equilibrium position Y = Z ≡ C + I + G and draw the IS curve on the graph. In the money market, the real money demand is (M d/P) = Y – 1,500i; and the real...
Consider a closed economy as represented by the following equations: C = 100 + .5YD I...
Consider a closed economy as represented by the following equations: C = 100 + .5YD I = 200 + .1Y – 800i T = 200 G = 200 YD = Y - T (1) Derive the IS equation from the equilibrium position of goods market. Draw the IS curve on the graph. (10 points)In the money market, assume the real money demand is (M d/P) = Y – 1,000i; and the real money supply is (Ms/P) = 700. (2) Derive...
Suppose the goods market in an economy is represented by the following equations. C = 500...
Suppose the goods market in an economy is represented by the following equations. C = 500 + 0.5YD           I = 500 – 2000 i + 0.1Y       G = 500 X = 0.1Y* + 100e          Q = 0.2Y - 100e                   T = 400 Y* = 1000                      i = 0.05 (5%)                        e = 1 Z = C + I + G + X - eQ                                               Y = Z (equilibrium condition) Suppose G increases by 100 (to 600). Calculate the new equilibrium level...
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...
Consider an economy represented by the following expenditure equations (in $ trillion): Y = C +...
Consider an economy represented by the following expenditure equations (in $ trillion): Y = C + I + G + NX C = 2 + ⅔(Y – T) I = 6 – r G = 4, T =3, NX = -1 What is the equation for the IS curve, Y=f(r)? For the short run, consider the inflation rate fixed at π = 2. The Central Bank wants to target the real interest rate r = 2. What should be the...
Consider an economy represented by the following expenditure equations (in $ trillion): Y = C +...
Consider an economy represented by the following expenditure equations (in $ trillion): Y = C + I + G + NX C = 2 + ⅔(Y – T) I = 6 – r G = 4, T =3, NX = -1 For the short run, consider the inflation rate fixed at π = 2. The Central Bank wants to target the real interest rate r = 2. What should be the target for the nominal interest rate, i? What is...
These are the equations for the goods, and money market in a hypothetical economy: C =...
These are the equations for the goods, and money market in a hypothetical economy: C = 250 + .8(Y-T) I = 100 - 50r T = G = 100. Ms = 200 Md = 0.2Y – 100r ANSWER FROM PART C AND LATER ---a) What is the equation of the IS curve? Is this upward or downward sloping? ----b) If T falls to 50 and everything else is unchanged, what is the equation of the new IS curve? c) Draw...
Suppose the goods-market of the economy of Macronium is described by the following equations Consumption: C...
Suppose the goods-market of the economy of Macronium is described by the following equations Consumption: C = 400 + 0.80 Yd where Yd refers to disposable (post-tax) income. Government collects lump-sum taxes at the amount 250 units, i.e. Taxes T = 250 Investment demand is given by Investment: I = 250 -500r Government purchases has two components: 1- Lump Sum government purchases at G' = 50 2- A proportional component g: 10% of the output, i.e. gY= 0.10Y Hence, total...
Suppose the United States economy is represented by the following equations: Z = C + I...
Suppose the United States economy is represented by the following equations: Z = C + I + G            C = 100 +0.5YD                     T = 200                     I = 30 YD = Y - T                 G = 100 Suppose the Okun's law is given by: ut - ut-1 = -0.4(gyt - 3%) a-) What is the output growth needed to result in reducing unemployment by 1% in a year. b-) What is the output growth needed to reduce unemployment by 2% over the next 4...
1.     Suppose the United States economy is represented by the following equations: Z = C + I...
1.     Suppose the United States economy is represented by the following equations: Z = C + I + G            C = 100 + .YD                     T = 200                     I = 30 YD = Y - T                 G = 100 Suppose that the wage and price setting relations are given by W = Pe(1-u) P = (1+μ) W a.      If P = Pe and the mark-up is 20% find the real wage b.     Calculate the natural rate of unemployment c.      Calculate the real wage and the natural rate of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT