Problem 2 (30 points) 1. An economy is characterized by the following behavioral relations: Investment: I...
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Problem 2 (30 points) 1. An economy is characterized by the following behavioral relations: Investment: I = 25(0.5 - i) Consumption: C = 20+.5(Y – T) Money demand: M = = Y(0.5 - i) Policy parameters are initially set at G = 20, T = 20, M = 32. 1. Derive the IS curve (Hint: find the expression for Y on the LHS in terms of i) (6 points) 2. Derive the LM curve (Hint: find the expression for i on the LHS in terms of Y) (6 points) 3. Find equilibrium Y and i. (6 points) 4. Derive and show graphically the effects of an increase in G from 20 to 25. (6 points) 5. Derive and show graphically the effects of an increase in M from 32 to 34. (6 points) Problem 2 (30 points) 1. An economy is characterized by the following behavioral relations: Investment: I = 25(0.5 - i) Consumption: C = 20+.5(Y – T) Money demand: M = = Y(0.5 - i) Policy parameters are initially set at G = 20, T = 20, M = 32. 1. Derive the IS curve (Hint: find the expression for Y on the LHS in terms of i) (6 points) 2. Derive the LM curve (Hint: find the expression for i on the LHS in terms of Y) (6 points) 3. Find equilibrium Y and i. (6 points) 4. Derive and show graphically the effects of an increase in G from 20 to 25. (6 points) 5. Derive and show graphically the effects of an increase in M from 32 to 34. (6 points)
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1 Deriving the IS Curve The IS curve represents equilibrium in the goods market Investment Consumption Government Spending Output Start with the equil... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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