3. (This is question 2, page 437 of the textbook) An economy is described by the following equations: Desired consumption Cd = 130+0.5(Y-T)-500r. Desired investment Id = 100-500r. Government purchases G = 100. Taxes T = 100. Real money demand L = 0.5Y-1000r. Money supply M = 1320. Full-employment output YFE = 500. Assume that expected inflation is zero so that money demand depends directly on the real interest rate. a. Write the equations for the IS and LM curves. (These equations express the relationship between r and Y when the goods and asset markets, respectively, are in equilibrium.) b. Calculate the full-employment values of output, the real interest rate, the price level, consumption, and investment. c. Suppose that, because of investor optimism about the future marginal product of capital, the investment function becomes Id= = 200-500r. Assuming that the economy was initially at full employment, what are the new values of output, the real interest rate, the price level, consumption, and investment in the short run? In the long run? Show your results graphically.

3. (This is question 2, page 437 of the textbook) An economy is described by the following equations: Desired consumption Cd = 130+0.5(Y-T)-500r. Desired investment Id = 100-500r. Government purchases G = 100. Taxes T = 100. Real money demand L = 0.5Y-1000r. Money supply M = 1320. Full-employment output YFE = 500. Assume that expected inflation is zero so that money demand depends directly on the real interest rate. a. Write the equations for the IS and LM curves. (These equations express the relationship between r and Y when the goods and asset markets, respectively, are in equilibrium.) b. Calculate the full-employment values of output, the real interest rate, the price level, consumption, and investment. c. Suppose that, because of investor optimism about the future marginal product of capital, the investment function becomes Id= = 200-500r. Assuming that the economy was initially at full employment, what are the new values of output, the real interest rate, the price level, consumption, and investment in the short run? In the long run? Show your results graphically.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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