Question

The economy of a country is represented by the model below:

Goods Market:

++ Consumption function: C = 15,000 + 0.75(Yd)

++ Investment function: I = 5,000 – 50i

++ Government expenditures: G = 5,000

++ Export function: X = 5,000

++ Import function: M = 1,000 + 0.1Y

++ Taxes: T = 1,000 + 0.1Y

Money Market:

++ Money Supply: Ms = 30

++ Money Demand (Transaction): Mdt = 0.25Y

++ Money Demand (Asset): Ma = 2,000 – 20i

(Yd = disposable income & Y = level of output in the economy, R = interest)

a) Calculate the equilibrium level of output and the equilibrium level of interest for this economy.

b) Please sketch diagrams illustrating the equilibrium.

c) Assume that the money supply DECREASES. Illustrate and explain the effects in both markets.

d) Assume that the exchange rate APPRECIATES. Illustrate and explain the effect in both markets.

Answer 1