(a) What is the value of the marginal propensity to consume (MPC) and to save (MPS)?...

  

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(a) What is the value of the marginal propensity to consume (MPC) and to save (MPS)? (b) Calculate the government-purchases multiplier. (c) Calculate the tax multiplier (Hint: do not forget the sign). (d) Derive the equation for the IS curve. (Hint: substitute C, I, G, and T. It is easier to solve for Y) (e) Derive the equation for the LM curve (Hint: Again, it is easier to solve for Y) (f) Use the equations from Parts d. and e. to calculate the equilibrium levels of interest rate, output, (g) Suppose that the president cuts taxes by 200: i. ii. iii. iv. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? What must the money supply be? What is the tax multiplier? (h) Suppose that the price level increases in the long run from 5 to 10. Calculate inflation and nominal interest rates in the long run (Hint: use Fisher equation) Goods Market (IS curve) ← Y=C+I+G C= 500+ 0.75(Y-T) I= 1,000 50r G = 1,000 T = 1,000 in equilibrium Money Market (LM curve) (M/P)d = M³/P M/PY-200r M = 6,000 P = 2 (a) What is the value of the marginal propensity to consume (MPC) and to save (MPS)? (b) Calculate the government-purchases multiplier. (c) Calculate the tax multiplier (Hint: do not forget the sign). (d) Derive the equation for the IS curve. (Hint: substitute C, I, G, and T. It is easier to solve for Y) (e) Derive the equation for the LM curve (Hint: Again, it is easier to solve for Y) (f) Use the equations from Parts d. and e. to calculate the equilibrium levels of interest rate, output, (g) Suppose that the president cuts taxes by 200: i. ii. iii. iv. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? What must the money supply be? What is the tax multiplier? (h) Suppose that the price level increases in the long run from 5 to 10. Calculate inflation and nominal interest rates in the long run (Hint: use Fisher equation) Goods Market (IS curve) ← Y=C+I+G C= 500+ 0.75(Y-T) I= 1,000 50r G = 1,000 T = 1,000 in equilibrium Money Market (LM curve) (M/P)d = M³/P M/PY-200r M = 6,000 P = 2

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