Question

In: Economics

18. Consider the following closed economy: C = 60 +0.8(Y-T) I = 150-1000i G = 250...

18. Consider the following closed economy:

C = 60 +0.8(Y-T)

I = 150-1000i

G = 250

T = 200

Ms/P = 100

Md/P = 40+0.1Y-1000i

a. Derive the IS and LM functions.

b. Find the equilibrium interest rate and the equilibrium level of income.

c. Suppose we change this model such that investment is assumed to be completely interest inelastic: that is, investment does not depend on the rate of interest or we have I=150. Write the new equations for the IS and LM schedules and illustrate them graphically. What is the new equilibrium value of income?

d. How would an increase in money stock affect equilibrium values of Y and i under (c) above? Illustrate and explain your answer.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

1. Consider the following model of the economy: C = 170+.6(Y-T) I = 250 G =...
1. Consider the following model of the economy: C = 170+.6(Y-T) I = 250 G = 300 T = 200a. What is the value of the marginal propensity to consume?b. What is the value of the government budget deficit?c. Calculate the equilibrium level of GDP and show you work on a Keynesian-Cross diagram.d. What is the value of the government-purchases multiplier? Show all your work and explain fully.e. Use your answer to part d to calculate the amount by which...
Given the following economy: Y = C(Y - T) + I(r) + G C(Y - T)...
Given the following economy: Y = C(Y - T) + I(r) + G C(Y - T) = a + b(Y - T) I(r) = c - dr M/P = L(r,Y) L(r,Y) = eY - fr i. Solve for Y as a function of r, the exogenous variables G and T, and the model's parameters a, b, c, and d. ii. Solve for r as a function of Y, M, P, and the parameters e and f. iii. Derive the aggregate...
Consider a closed economy described by the following: Y = 2,000 G = 700 T =...
Consider a closed economy described by the following: Y = 2,000 G = 700 T = 500 C = 100 + 0.6(Y – T) I = 750 – 50r a.       Find consumption. b.       Find the equilibrium interest rate. c. Find investment. d. Find private saving, public saving, and national saving.
closed economy without export or import I = $60 G = 140 T= 0.2 Y savings...
closed economy without export or import I = $60 G = 140 T= 0.2 Y savings function is = -100 + 0.25Y where Y= (Yd - T) show numerically using these data that in equilibrium the sum of leakages equal the sum of injections?
Let the following equations characterize an economy: C = 400 + 0.8*(Y-T) G = 300 T...
Let the following equations characterize an economy: C = 400 + 0.8*(Y-T) G = 300 T = 250 I = 200 a. Draw a graph of planned expenditures for this economy and calculate the equilibrium level of output.                                                 b. Suppose output this year was 3000. Is the economy in equilibrum? c. If the government wanted to use fiscal policy to move the economy to equilibrium, by how much would it have to increase government spending? What is the government...
Consider the following macroeconomic model: C(t) + I(t) = Y (t) I(t) = 0.8 dC(t) dt...
Consider the following macroeconomic model: C(t) + I(t) = Y (t) I(t) = 0.8 dC(t) dt C(t) = 0.4Y (t) + 1 where C(t), I(t), Y (t) denote respectively the consumption, investment and national income at time t. Write the differential equation in terms of C(t), find the solution for the differential equation, and draw the phase diagram and comment on the stability.
Consider a hypothetical economy where: • C(Yd) = 105 + 0.8 × (Y − T) •...
Consider a hypothetical economy where: • C(Yd) = 105 + 0.8 × (Y − T) • I(r) = 74 − 1 × r • G = 65 • T = 50 1. Using the information above, write out the planned Aggregate Expenditure equation. 2. Write down an expression for the Investment-Savings (IS) Curve. 3. Assume that inflation is zero, so that i = r. This economy’s central bank follows a given Monetary Policy Rule: r = i = 0.003 ×...
Consider a hypothetical economy where: • C(Yd) = 105 + 0.8 × (Y − T) •...
Consider a hypothetical economy where: • C(Yd) = 105 + 0.8 × (Y − T) • I(r) = 74 − 1 × r • G = 65 • T = 50 1. Using the information above, write out the planned Aggregate Expenditure equation. 2. Write down an expression for the Investment-Savings (IS) Curve. 3. Assume that inflation is zero, so that i = r. This economy’s central bank follows a given Monetary Policy Rule: r = i = 0.003 ×...
c = 100 + 0.8 (y - t) i = 500 - 50r g = 400...
c = 100 + 0.8 (y - t) i = 500 - 50r g = 400 t = 400 Md = P(0.2y + 500 – 25r) Price level is fixed at 1. The money supply is 520 The government increases taxes by one unit. Calculate the shift of the IS curve. What is the change in the level of aggregate demand? What is the change in the interest rate and investment? What is the change in disposable income and consumer...
Consider an economy described by the following equations: Y=C+I+G+NX, Y=8,000 G=2,500 T=2,000 C=500 + 0.75(Y−T) I=900−50r...
Consider an economy described by the following equations: Y=C+I+G+NX, Y=8,000 G=2,500 T=2,000 C=500 + 0.75(Y−T) I=900−50r NX=1,500−250ϵ r=r∗=8. In this economy, solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. Suppose now that G is cut to 2,000. Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find. Now suppose that the world interest rate falls from 8 to 3 percent....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT