1) Consider the following IS–LM model: C = 200 + .25YD, I=150+ .25Y - 1000i G = 250, T = 200 , NX = 0, (M/P)d = 2Y - 8000i , M/P = 1600. a) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. b) Now suppose that the money supply increases to M/P =1,840. Solve for Y, į, c, and T, and describe in words the effects of an expansionary monetary policy. c) Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, į, C. d) The expansionary fiscal policy in part (c) have resulted in large budget deficit (T – G = 200 – 400 = -200). Suggest a policy mix to decrease fiscal deficit to achieve a balanced budget (T – G = 0).

1) Consider the following IS–LM model: C = 200 + .25YD, I=150+ .25Y - 1000i G = 250, T = 200 , NX = 0, (M/P)d = 2Y - 8000i , M/P = 1600. a) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. b) Now suppose that the money supply increases to M/P =1,840. Solve for Y, į, c, and T, and describe in words the effects of an expansionary monetary policy. c) Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, į, C. d) The expansionary fiscal policy in part (c) have resulted in large budget deficit (T – G = 200 – 400 = -200). Suggest a policy mix to decrease fiscal deficit to achieve a balanced budget (T – G = 0).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

7.2

1) Consider the following IS-LM model:
C= 200 + .25YD, I=150+ .25Y - 1000i G = 250 ,
T= 200 ,
NX = 0,
(M/P)d = 2Y - 8000i , M/P = 1600.
a) Solve for the equilibrium values of C and I, and verify the value you obtained
for Y by adding C, I, and G.
b) Now suppose that the money supply increases to M/P =1,840. Solve for Y, i, c,
and T, and describe in words the effects of an expansionary monetary policy.
c) Set M/P equal to its initial value of 1,600. Now suppose that government
spending increases to G= 400. Summarize the effects of an expansionary fiscal
policy on Y, į, C.
d) The expansionary fiscal policy in part (c) have resulted in large budget deficit
(T - G = 200 – 400 = -200). Suggest a policy mix to decrease fiscal deficit to
achieve a balanced budget (T –G= 0).

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