IS-LM Model- Consider an economy in the short-run with the price level P fixed at 1 (P
Question:
IS-LM Model- Consider an economy in the short-run with the price level P fixed at 1 (P = 1). Now we have I = I(r), a financial sector and taxes a function of income.
C = 100 + 0.75 * (Y –T)I = 750 –20 * r
T = -40 + (1/3)Y
G = 1000;
Y = C + I + G
(M/P)d= 0.4 * Y –48 * i
Ms= 1,200(M/P)d= Ms/P
Suppose investors and bond traders expect inflation, ?e= 0, so that i = r. 1.) Calculate the IS curve, i.e., solve for Y in terms of r. 2.) Calculate the LM curve. Again, solve for Y in terms of r. 3.) What are the short-run equilibrium values for Y, r, C, I. [r will not be in decimal form] 4.) Show that C + I +G = Y and that S = I. 5.) Present a properly labeled IS-LM graph showing theequilibrium level of Y and r. 6.) What is the government spending multiplierwhen G increases by 200? That is, calculate? Y/?G? [NOTE, it’s not 1-/(1-MPC)] 7.) Is ? Y/ ?Gfrom part (f)the same as 1-/(1-MPC+MPC(t))? If not, explain why?
Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez