Let the IS equation be A 1-b where 1 -b is the marginal propensity to save, g is the investment sensitivity to inter- est rates, and A is an aggregate of exogenous variables. Let the LM equation be Mo. 1. k where k and I are income and interest sensitivity of money demand, respectively, and Mo is real money balances. If b=0.7, g=100, A = 252, k = 0.25, != 200, and M = 176, then (a) Write the IS-LM system in matrix form. Y = 9 -1 1-b
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- Consider the following IS-LM model: C = 200 + 0.25 YD ; I = 150 + 0.25Y – 1000i ; G = 250 ;T = 200 ; (M/P)d = 2Y – 8000i ; M/P = 1600Derive the (a) IS-relation and the (b) LM-relation.Solve for the equilibrium (c) real output and (d) interest rate.(e) Solve for the equilibrium values of C and I and verify yourequilibrium output by: Y = C + I + G(f) Now suppose that the money supply increases to M/P = 1840. Solve for Y, i, C, I and describe in words the effectsof monetary expansion.(g) Set M/P to its initial value 1600. Suppose, that governmentspending increases to G=400. Summarize the effects offiscal expansion on Y, i, and C.The consumption function of the economy of Macro-land is given by ? = 200 + 0.75(? − ?)The investment function is given by ? = 200 − 25? . Government purchases and taxes are both 100. (a) Find the equation of the IS curve (b) The money demand function in Macro-land is given byMd= ? − 100? The nominal money supply M is 1,000 and the price level is 2. Find the equation of theLM curve (c) Find the interest rate and income for which the goods and services and money marketsare simultaneously in equilibrium. (d) Suppose the government purchases are raised from 100 to 150. What are the newequilibrium interest rate and income? (e) Suppose that the money supply is raised from 1,000 to 1,200. What are the newequilibrium interest rate and national income? (f) How will fiscal expansion in the country (Macro-land) affect national income,employment, interest rate, price level and real money balance under the Keynesianaggregate supply condition? NB: Kindly answer all questionsQUESTION TWOConsider the consumption function is given byC = 200 + 0.75YDWhere YD is disposable income Suppose that the economy faces an investment function of the formI = 200 – 25r.Suppose further that G =T = 100 and the money demand function takes the form(M/P) = Y – 100r.The money supply M is 1,000 and Price level P is 2Required:(i) Formulate the IS equation and the LM equation.(ii) Find the equilibrium interest rate and the equilibrium level of income. (iii) If government expenditure increases by 50, by how much does the IS curveshift? (iv) If the money supply increases by 200. How much does the LM curve shift?
- In a particular economy the real money demand function is Real Interest Rate, r (%) 0.451 M 0.40- 3,000 + 0.10Y-9,000i. P 0.35- Assume that M = 7,000 and P = 2. Initially, expected inflation, zewas 0.02. Initially, when Y= 8000, the real interest rate of 0.013 cleared the asset market and when Y = 9000, the real interest rate of 0.024 cleared the asset market. The initial LM curve is drawn as 0.30- 0.25 0.20- LM,. 0.15- Now suppose that the expected inflation rate increases to 0.03. Using the new expected inflation rate, calculate the real interest rate that clears the asset market when Y = 8000. (Enter your answer in decimals, rounded to three decimals.) D. This is point C. 0.10- LM, 0.05- 0.00+ 7 8 10 Output, Y (thousands)Title If someone could show me how to solve this IS-LM problem that would be very helpful. Thanks! Show tr Description If someone could show me how to solve this IS-LM problem that would be very helpful. Thanks! Show transcribed image text Desired consumption: C^d = 580 + [0.55 x (Y - T)] - 45r Desired investment: I^d = 430 - 40r Real money demand: L = 0.6 Y - 95i Full-employment output: Y = 2,210 Expected inflation pi^c : 0.03 In this economy the government always has a balanced budget, so T = G, where T is total taxes collected. a. Suppose that T = G = 150 and that M = 4,320. Use the classical IS-LM model to determine the equilibrium value of the real interest rate. (flint: In the classical model output always equals its full-employment level.) The equations are: The initial equilibrium values of output, real interest rate, consumption, investment and the price level were found to be: Output = 2,210 Real interest rate = 0.97 Consumption = 1,669.4 Investment = 391.2 Price…Given the following informations; Consumption(C) 800+0.9Y, Where Y-Income Investment (I) =8000-800r, where r=interest rate Money Supply (Ms) =28500 Demand for Money (Md) =0.75Y-1500r and if the autonomous Investment decreased then %3D income decreased and interest rate increased. income increased and interest rate decreased. O income decreased and interest rate decreased income increased and interest rate increased
- Which of the following can hurt economic growth in the short run but help it in the long run? O population growth O improved health and nutrition O enforcement of property rights O increased educational attainment O political stability Question 31 Assume the RRR is 8% and that the deposit creation multiplier works as described in class (i.e., the "simplified" deposit creation multiplier). What will be the total of deposits in the banking system resulting from an initial deposit of $1,000? O $8,000 O $5,000. $10,000 O $1,250Consider an economy with the following features: Consumption, C = 130 + 0.5 Yd Income tax, T= 20 + 0.2 Y Investment, |= 200 – 60Or Government expenditure, G= 112 Real money demand, Ma/P= 50 + 0.5 Y – 600r Nominal money supply, Ms = 600 %3D Price level, P= 2 where Yd stands for disposable income, and r for the rate of interest. i. Derive the IS and LM equations. ii. Calculate the equilibrium levels of income and rate of interestThe following equations relate to a certain economy, peruse them and answer thefollowing questions.T = 0.75Y (tax rate)L= Y - 100r (Real money demand)M = 300 (Read money supply)C = 200 + 0.25Y d (Consumption function)I = 20 - 10r (Investment function)G = 30 (government purchases) i) Derive equations fro IS and LM curvesii) Determine the rand y pair at which the two markets are clearing iii) Compute the values of C, I and L.
- Suppose that conditions in the economy are such that the after-tax expected real interest rate is described by the equationRa = a X gWhere a is a number that depends on how people value their consumption in one period compared with another period, and g is the growth rate of the economy. The a equals 1 when people prefer consumption to be balanced, with the same amount of consumption each period; a may be bigger than the one when people prefer consumption today over consumption in the future, with a being larger and larger the more impatient people are:A - Suppose that a = 2, g = 0.02, the inflation rate is expected to be steady at pi = 0.03, and the tax rate is .40. What are the values of the equilibrium nominal interest rate and the before-tax expected real interest rate?B - Beginning with the situation in part a, if the growth rate of the economy increases to .04, what are the new values of the equilibrium nominal interest rate and the before-tax expected real interest rate?C -…Suppose that conditions in the economy are such that the after-tax expected real interest rate is described by the equationRa = a X gWhere a is a number that depends on how people value their consumption in one period compared with another period, and g is the growth rate of the economy. The a equals 1 when people prefer consumption to be balanced, with the same amount of consumption each period; a may be bigger than the one when people prefer consumption today over consumption in the future, with a being larger and larger the more impatient people are:D - Beginning with the situation in part a, if the expected inflation rate declings to 0.01, what are the new values of the equilibrium nominal interest rate and the before tax expected real interest rate?E - From these results, what general conclusions can you draw about the relationship between the nominal interest rate and the rate of economic growth, the tax rate, and the inflation rate? what about the relationship between the before…Suppose that conditions in the economy are such that the after-tax expected real interest rate is described by the equationRa = a X gWhere a is a number that depends on how people value their consumption in one period compared with another period, and g is the growth rate of the economy. The a equals 1 when people prefer consumption to be balanced, with the same amount of consumption each period; a may be bigger than the one when people prefer consumption today over consumption in the future, with a being larger and larger the more impatient people are:A - Suppose that a = 2, g = 0.02, the inflation rate is expected to be steady at pi = 0.03, and the tax rate is .40. What are the values of the equilibrium nominal interest rate and the before-tax expected real interest rate?B - Beginning with the situation in part a, if the growth rate of the economy increases to .04, what are the new values of the equilibrium nominal interest rate and the before-tax expected real interest rate?C-…