Consider the following economy: Labor supply: N t = 90 Capital stock: K t = 90 Government
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Question:
Consider the following economy:
Labor supply: Nt= 90
Capital stock: Kt = 90
Government spending: Gt = 20
Tax collections: Tt = 20
Production function: Yt = 2(Kt)0.5 (Nt)0.5
Real money demand Lt = 2Yt - 200rt
Consumption function: Ct = 16 + 0.8(Yd)t
Domestic price level: Pt = 4
Investment function: It = 25 - 50rt
Nominal money supply: Mt = 1296
QUESTIONS:
- Find an expression for the IS curve.
- Find an expression for the LM curve.
- Find an expression for the aggregate demand curve.
- What are the short run equilibrium values for output, interest rate and price level?
- Plot (a)-(d) on the IS-LM and AD-SRAS-LRAS diagrams. Make sure to label (i) the axes, (ii) the curves and (iii) the initial equilibrium levels.
- Is this a short-run level of output also a long-run equilibrium? Explain.
- Suppose that the government the Fed increases money supply to Ms=1620. Find the new short-run equilibrium levels of output and interest rate
- Find the long-run equilibrium levels of output, interest rates and prices.
- Graph this combination of policies both in the short and in the long run.
- Explain how the adjustment from the short-run to the long-run occurs.
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