Question: Abel, Bernanke and Croushore, 10th edition, Chapter 9, Numerical Problems, No. 5. Consider the following economy: Desired consumption Ca = 1275 +0.5(Y - T)

Abel, Bernanke and Croushore, 10th edition, Chapter 9, Numerical Problems, No. 5.

Abel, Bernanke and Croushore, 10th edition, Chapter 9, Numerical Problems, No. 5. Consider the following economy: Desired consumption Ca = 1275 +0.5(Y - T) - 200r. Desired investment Id = 900 - 200r Real money demand L = 0.5Y - 200i Full employment output = 4600 Expected inflation = 0. a. Suppose that T = G = 450 and that M = 9000. Find an equation describing the IS curve. (Hint: Set desired national saving and desired investment equal, and solve for the relationship between r and Y.) Find an equation describing the LM curve. (Hint: Set real money supply and real money demand equal, and again solve for the relationship between r and Y, given P.) Finally, find an equation for the aggregate demand curve. (Hint: Use the IS and LM equations to find a relationship between Y and P.) What are the general equilibrium values of output, consumption, investment, the real interest rate, and price level? b. Suppose that T = G = 450 and that M = 4500. What is the equation for the aggregate demand curve now? What are the general equilibrium values of output, consumption, investment, the real interest rate, and price level? Assume that full employment output Y is fixed. c. Repeat Part (b) for T = G = 330 and M = 9000.

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