(a) The equilibrium conditions for the money market and product market for a given economy is...

  

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(a) The equilibrium conditions for the money market and product market for a given economy is given as follows: Product market : y=cy-ty+ir+g Money M =1[r]+k(y) market: P Where y real income, t=¿ tax rate, i= expenditure, g= government expenditure, money supply, r interest rate levels, 1(r) = P= speculative demand for money, and transactionary demand for money. (i) Derive the fiscal policy multiplier investment nominal M = price levels, k(y)=¿ 4 (ii) Using the following numerical information for the economy, compute the fiscal policy multiplier for whose derivation you did in part (a) (i). C=10+0.6 Yd I=50-25r L=2Y-100r G=22 T=0.20 Consumption function M=300 Investment function Real money demand Government purchases Tax rate Real money supply (iii) Interpret the fiscal policy multiplier (b) Assuming a perfect market systems (where there is perfect factor mobility and information flow), use a well-labeled diagram to demonstrate how a surplus in the supply of foreign exchange would be eliminated. 2 marks 1 mark 8 marks (a) The equilibrium conditions for the money market and product market for a given economy is given as follows: Product market : y=cy-ty+ir+g Money M =1[r]+k(y) market: P Where y real income, t=¿ tax rate, i= expenditure, g= government expenditure, money supply, r interest rate levels, 1(r) = P= speculative demand for money, and transactionary demand for money. (i) Derive the fiscal policy multiplier investment nominal M = price levels, k(y)=¿ 4 (ii) Using the following numerical information for the economy, compute the fiscal policy multiplier for whose derivation you did in part (a) (i). C=10+0.6 Yd I=50-25r L=2Y-100r G=22 T=0.20 Consumption function M=300 Investment function Real money demand Government purchases Tax rate Real money supply (iii) Interpret the fiscal policy multiplier (b) Assuming a perfect market systems (where there is perfect factor mobility and information flow), use a well-labeled diagram to demonstrate how a surplus in the supply of foreign exchange would be eliminated. 2 marks 1 mark 8 marks

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To derive the fiscal policy multiplier we first need to use the information given in part i The fisc... View the full answer