Question

In: Economics

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

  1. Assume the following IS-LM model:

         expenditure sector:                     money sector:

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

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

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

         TA = (1/4)Y + 20

         TR = 80

         I     = 250 - 5i

         G   = 130

         NX = -30

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

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

Solutions

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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