Intermediate macroeconomics, Macroeconomics

Assignment Help:

An economy's IS and LM curves are given by the following equations:

1797_Intermediate Macroeconomics.png

with Y indicating output (income), c indicating the marginal propensity to consume, I investment, G government spending, and r the real interest rate. M is money supply, P the price level, and L (Y,r) is the money demand function.

The government of this country institutes an investment tax credit (ITC). As a consequence, investors begin to make more investments at any given level of r.

(a) Suppose that the marginal propensity to consume  c is 0.8 and that the investment increase coming from the ITC is equal to $1,000. By how many $ will income exactly change in the Keynesian Cross?

(b) How will the ITC affect income, the interest rate, consumption and investment in the IS-LM model? Use the IS-LM model graph (plus other  graphs, if necessary) to support your answer.

Make sure that you label your graph properly and explain carefully in which direction and why particular curves shift.

(c) Is the impact of this policy on equilibrium income in the IS-LM model larger or smaller than the impact on income in the Keynesian Cross? Explain why.

(d) What should the central bank do in order to keep the interest rate at the initial level? Explain carefully and support your answer with a graph.


Related Discussions:- Intermediate macroeconomics

Production Possibilities Frontier, A friend says that the economy will prod...

A friend says that the economy will produce inside the PPF curve (like pt E below) since we in the economy value saving, or for some other reason. You say this is incorrect. Why? U

Heckscher-ohlin theory, Suppose Nigeria has 20 million workers and 16 milli...

Suppose Nigeria has 20 million workers and 16 million units of capital, while Botswana has 5 million workers and 3.5 million units of capital. Which of the following statements is

GDP, NATIONAL INCOME STATISTICS

NATIONAL INCOME STATISTICS

Economic growth and economic development, #question.distinguish between eco...

#question.distinguish between economic growth and economic development.

Real Gdp, What do I calculate with quantity of each good produced, to find ...

What do I calculate with quantity of each good produced, to find the Real GDP?

Market for a particular type of computer memory chip, 1. Consider the marke...

1. Consider the market for a particular type of computer memory chip. Would you expect the long-run (own-price) elasticity of supply to be larger or smaller than the short-run elas

Artificial intelligence and neural networks, Problem >> Explore the rel...

Problem >> Explore the relationship between Artificial intelligence and Neural networks. The systems which use this type of intelligence are known as artificial intelligent

Circular flow of income in an open economy, explain the effects of various ...

explain the effects of various injections and withdrawals and show the equilibrium in the circular flow

Moving along a demand curve, Moving along a demand curve, quantity demanded...

Moving along a demand curve, quantity demanded decreases 8 percent when price increases 10 percent. a. The price elasticity of demand is calculated to be____________ b. Given the

Royalty payments year by year, Company A owns a patent with 15 years of rem...

Company A owns a patent with 15 years of remaining life. Company B is paying royalties to Company A for a license to the patent. It is estimated that royalty payments (end-of- year

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd