Reference no: EM132405847
1. Let the structure of the commodity market be represented by the following equations:
C=Ca+0.75(Y-T)
Ca=200-10r
T=200+0.2Y
Ip=350-30r
and G=350
- What is the value of the multiplier (k)?
- What is the equation of the autonomous planned expenditure function?
- What is the equation of the IS curve?
- What is the slope of the IS curve
- If government spending increased by 50, at what value on the horizontal axis would the new IS curve intersect it? What would happen to the slope of the IS curve?
2. The equation of the LM curve is given by the following formula: r = (h/f)Y - (1/f)(M^s/P), where M^s/P is the real money supply, h is the response of the money to a $1 change in income at a fixed interest rate, and f is the response of money demand to a one percentage point change in the interest rate. Assume the following values for the exogenous variable M^s/P and parameters h and f in the LM curve: M^s/P = 300, h = 0.4, and f = 50.
(a) What is the horizontal intercept of the LM curve?
(b) What is the slope (Delta r/Delta Y)? of the LM curve?
(c) What is the equation of the LM curve?
(d) If the Fed increased the money supply by 100, at what value on the horizontal axis would the LM curve intersect it? What happens to the slope of the LM curve?
3. Assume that the following equations summarize the structure of an economy.
C=Ca+0.8(Y-T)
Ca=700-15r
T=200+0.2Y
(m/p)^d=0.1Y-10r; (m/p)^s=440
I=600-25r
G=1000
NX=100-0.04Y
Answer the following questions:
(a) What is the equation of the IS curve?
(b) What is the equation of the LM curve?
(c) What is the equilibrium real output?
(d) What is the equilibrium interest rate?
(e) What is the level of saving at equilibrium?
(f) What is the level of planned investment at equilibrium?
(g) Determine whether leakages equal injections at equilibrium.
(h) Assume that r = 4 and Y = 5000. Is there an excess demand for money or an excess supply of money? How much? Is there unplanned inventory change? If so, what is its value?
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