14. An economy is initially described by the following equations: C=400+ 0.85(Y-T). I = 1000 - 40 r. (M/P)d = Y - 100r. G= 1,000. T = 1,200. M = 10,000. P = 4. a. Derive and graph the IS curve and the LM curve. Calculate the equilibrium interest rate and level of income. Label that point A on your graph. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new equilibrium interest rate and level of income? What is the tax multiplier? Show your work. b. c. Now assume that the central bank adjusts the money supply to hold the interest rate constant. What is the new level of income? What must the new money supp be? What is the tax multiplier? Show your work. d. Now assume that the central bank adjusts the money supply to hold the level of income constant. What is the new equilibrium interest rate? What must the mone supply be? What is the tax multiplier? Show your work. e. Show the equilibria you calculated in parts (b), (c), and (d) on the graph you dre in nart (a) Label them points RC and D

14. An economy is initially described by the following equations: C=400+ 0.85(Y-T). I = 1000 - 40 r. (M/P)d = Y - 100r. G= 1,000. T = 1,200. M = 10,000. P = 4. a. Derive and graph the IS curve and the LM curve. Calculate the equilibrium interest rate and level of income. Label that point A on your graph. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new equilibrium interest rate and level of income? What is the tax multiplier? Show your work. b. c. Now assume that the central bank adjusts the money supply to hold the interest rate constant. What is the new level of income? What must the new money supp be? What is the tax multiplier? Show your work. d. Now assume that the central bank adjusts the money supply to hold the level of income constant. What is the new equilibrium interest rate? What must the mone supply be? What is the tax multiplier? Show your work. e. Show the equilibria you calculated in parts (b), (c), and (d) on the graph you dre in nart (a) Label them points RC and D

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

14. An economy is initially described by the following equations:
C=400+ 0.85(Y-T).
I = 1000 - 40 r.
(M/P)d = Y - 100r.
G = 1,000.
T = 1,200.
M = 10,000.
P = 4.
a. Derive and graph the IS curve and the LM curve. Calculate the equilibrium
interest rate and level of income. Label that point A on your graph.
Suppose that a newly elected president cuts taxes by 25 percent. Assuming the
money supply is held constant, what are the new equilibrium interest rate and
level of income? What is the tax multiplier? Show your work.
b.
c. Now assume that the central bank adjusts the money supply to hold the interest
rate constant. What is the new level of income? What must the new money supply
be? What is the tax multiplier? Show your work.
d. Now assume that the central bank adjusts the money supply to hold the level of
income constant. What is the new equilibrium interest rate? What must the money
supply be? What is the tax multiplier? Show your work.
e. Show the equilibria you calculated in parts (b), (c), and (d) on the graph you drew
in part (a). Label them points B, C, and D.

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