1. IS-LM-AD Suppose the economy of Canada is governed by the following consumption function, investment function, and fixed values of government expenditure and taxes C =300+0.6(Y-T), I =700-80r, G =500, T =500. Further, suppose that the money demand function, money supply, and price level are given by ()- =Y- 200r, P М - 3000, P =2. (a) Compute the IS and LM curves, and plot these curves for interest rates ranging from 0% to 15%. Find the equilibrium levels of Y and r. (b) Suppose that the government increases expenditures to G= 700. What are the new equilibrium values of Y and r. What is the government expenditure multiplier? (c) For the initial levels of government expenditure (G = 500), compute the aggregate demand curve. What is the level of aggregate demand when the price level is equal %3D to 4?

1. IS-LM-AD Suppose the economy of Canada is governed by the following consumption function, investment function, and fixed values of government expenditure and taxes C =300+0.6(Y-T), I =700-80r, G =500, T =500. Further, suppose that the money demand function, money supply, and price level are given by ()- =Y- 200r, P М - 3000, P =2. (a) Compute the IS and LM curves, and plot these curves for interest rates ranging from 0% to 15%. Find the equilibrium levels of Y and r. (b) Suppose that the government increases expenditures to G= 700. What are the new equilibrium values of Y and r. What is the government expenditure multiplier? (c) For the initial levels of government expenditure (G = 500), compute the aggregate demand curve. What is the level of aggregate demand when the price level is equal %3D to 4?

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Question

1. IS-LM-AD
Suppose the economy of Canada is governed by the following consumption function,
investment function, and fixed values of government expenditure and taxes
C =300 +0.6(Y-T),
I =700- 80r,
G =500,
T =500.
Further, suppose that the money demand function, money supply, and price level are
given by
=Y- 200r,
М - 3000,
P 2.
(a) Compute the IS and LM curves, and plot these curves for interest rates ranging from
0% to 15%. Find the equilibrium levels of Y and r.
(b) Suppose that the government increases expenditures to G = 700. What are the new
equilibrium values of Y and r. What is the government expenditure multiplier?
500), compute the aggregate
(c) For the initial levels of government expenditure (G
demand curve. What is the level of aggregate demand when the price level is equal
to 4?
(d) Now consider the case where G increases to 700. What is the new level of aggregate
demand when holding the price level equals 4?
1
(e) Suppose that investment is now more sensitive to movements in r. What will hap-
pen to the aggregate demand curve? Do you think this will make monetary and
fiscal policy have larger impacts on aggregate demand for a given price level?

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