Consider the following closed economy C 140+0.7YD I= 100+ 0.1Y - 200i G = 230 T...
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Consider the following closed economy C 140+0.7YD I= 100+ 0.1Y - 200i G = 230 T = 200 Md P M = 6000 P = 5 = Y - 2000i where C' is consumption expenditure, Y is income and output, Y is disposable income, I is investment expenditure, i is the interest rate, G is government expenditure, T is tax, is the demand for real money, M is money supply, and P is the price level. (a) Derive the IS relation in this economy. (3 Marks) (3 Marks) (b) Derive the LM relation in this economy. (c) Solve for the equilibrium level of income and the rate of interest. (3 Marks) (d) Suppose that the current level of output is lower than the natural level Y. Assuming there are no other shocks or policy changes (that is, money supply M, government spending G and taxes I do not change), explain fully how the economy adjusts to its medium-run equilibrium. Illustrate graphically using the AS-AD model. What happens to output and prices over time? (5 Marks) Consider the following closed economy C 140+0.7YD I= 100+ 0.1Y - 200i G = 230 T = 200 Md P M = 6000 P = 5 = Y - 2000i where C' is consumption expenditure, Y is income and output, Y is disposable income, I is investment expenditure, i is the interest rate, G is government expenditure, T is tax, is the demand for real money, M is money supply, and P is the price level. (a) Derive the IS relation in this economy. (3 Marks) (3 Marks) (b) Derive the LM relation in this economy. (c) Solve for the equilibrium level of income and the rate of interest. (3 Marks) (d) Suppose that the current level of output is lower than the natural level Y. Assuming there are no other shocks or policy changes (that is, money supply M, government spending G and taxes I do not change), explain fully how the economy adjusts to its medium-run equilibrium. Illustrate graphically using the AS-AD model. What happens to output and prices over time? (5 Marks)
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The image you provided contains equations and a set of questions pertaining to a closed economy in the context of macroeconomics The model is based on the ISLM framework where the IS curve represents ... View the full answer
Related Book For
Macroeconomics
ISBN: 978-0321675606
6th Canadian Edition
Authors: Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Ronald D. Kneebone
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