Assume C = c0 + c1YD I = b0 + b1Y b2i and furthermore exogenous G
Question:
Assume C = c0 + c1YD I = b0 + b1Y − b2i and furthermore exogenous G and T, and c1 + b1 < 1.
(a) Solve for equilibrium output. State the multiplier, and compare it to that of Questions 1 and 4(a). 2
(b) Assume the central bank sets the interest rate at i = i ∗ , and that the IS curve intersects the LM curve at Y = Y ∗ . Draw an IS-LM diagram to illustrate.
(c) The equilibrium condition in the financial market is M/P = d1Y − d2i. Suppose the federal government implements a fiscal expansion through an increase in G, while the central bank maintains i = i ∗ . What are the consequences of these policies in goods and financial markets, respectively? Briefly explain.
Managerial Accounting
ISBN: 978-1118385388
2nd edition
Authors: Ramji Balakrishnan, Konduru Sivaramakrishnan, Geoff B. Sprinkle