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How much of private domestic investment will be crowded out

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Reference no: EM13180231

Q.  Assume the following IS-LM model:

     expenditure sector:             money sector:

     Sp   = C + I + G + NX             M  = 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

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

(b)   How much of investment (I) will be crowded out if the government increases spending by DG = 100?

Reference no: EM13180231

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