Question

In: Economics

Assume the following IS-LM model: expenditure sector: money sector: &n

Assume the following IS-LM model:

expenditure sector: money sector:

AD = C + I + G + NX M_s = 500

C = 110 + (2/3)YD P = 1

YD = Y - TA + TR m_d = (1/2)Y + 400 - 20i

TA = (1/4)Y + 20

TR = 80

I = 250 - 5i

G = 130

NX = -30

Calculate the equilibrium values of private domestic investment (I), tax revenues (TA), and real money demand (m_d).

How much of private domestic investment (I) will be crowded out if government purchases are increased by DG = 100?

Expert Solution

Solution:

a.)

From Y=AD ==>

IS-curve

From

From IS = LM

b)

If government purchases are increased by , the IS-curve will shift by

,

and the new IS-curve is of the form Y=1200-10i

Therefore, fro IS1=LM

Check: I1 = 250-5*20=150

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Rahul Sunny answered 2 years ago

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