very important! please answer all questions 4. You are given the following information about the economy. Show your calculations and put answers ondesignated lines.C = 150 +0.75 YD - 10 r1,75 +0.1 Y - 20 rG = 460NX = 35T = 0.20 YYD=Y-TEp=C+I+G + NX4A.(i) Derive the equations for the IS and LM curves:ISLM(ii) Illustrate graphically. Be sure to label graph carefully and draw to scale. You may use the graph paper on thelast page but that's optional.(iii) Calculate the equilibrium GDP and interest rate.GDPInterest Rate4B. Suppose government spending is decreased to 340 (decrease of 120) in order to balance the budget.(i) Derive the IS and LM curves and graph them on the same graph as Part A.ISLM(M/P)$ = 300(M/P)P=0.3 Y - 30 r(ii) Calculate the new GDP and interest rate.GDPInterest Rate(iii) Explain why GDP and interest rate changed. Question 4 continued:4C. (1) Calculate the government spending multiplier in this IS-LM model(ii) What would the government spending multiplier have been in the simple Keynesian model if taxes areproportional to income (with the same marginal propensity to consume and tax rate as here)?(iii) Explain why the government spending multiplier in this IS-LM model (i above) is smaller than the multiplierin the simple Keynesian model with proportional taxes (ii above).4D. i. Calculate the Budget Surplus in Part 4A and Part 4B (at G=460 and then G=340):Budget Surplus in part 4A_Budget Surplus in part 4B_ii. Explain why the fiscal deficit was not eliminated in spite of the large decrease in G of 120.iii. What does this imply about attempts to balance the budget by reducing G when the economy is in a recession?iv. What policy might the Fed enact to counter the effects on GDP of trying to reduce the fiscal deficit? Explainwhat the Fed would do and illustrate with an IS-LM graph (no numbers are required for this answer, just a generalIS-LM graph).

Answered: 4A. (i) Derive the equations for the IS…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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very important! please answer all questions

4. You are given the following information about the economy. Show your calculations and put answers on
designated lines.
C = 150 +0.75 YD - 10 r
1,75 +0.1 Y - 20 r
G = 460
NX = 35
T = 0.20 Y
YD=Y-T
Ep=C+I+G + NX
4A.
(i) Derive the equations for the IS and LM curves:
IS
LM
(ii) Illustrate graphically. Be sure to label graph carefully and draw to scale. You may use the graph paper on the
last page but that's optional.
(iii) Calculate the equilibrium GDP and interest rate.
GDP
Interest Rate
4B. Suppose government spending is decreased to 340 (decrease of 120) in order to balance the budget.
(i) Derive the IS and LM curves and graph them on the same graph as Part A.
IS
LM
(M/P)$ = 300
(M/P)P=0.3 Y - 30 r
(ii) Calculate the new GDP and interest rate.
GDP
Interest Rate
(iii) Explain why GDP and interest rate changed.

Question 4 continued:
4C. (1) Calculate the government spending multiplier in this IS-LM model
(ii) What would the government spending multiplier have been in the simple Keynesian model if taxes are
proportional to income (with the same marginal propensity to consume and tax rate as here)?
(iii) Explain why the government spending multiplier in this IS-LM model (i above) is smaller than the multiplier
in the simple Keynesian model with proportional taxes (ii above).
4D. i. Calculate the Budget Surplus in Part 4A and Part 4B (at G=460 and then G=340):
Budget Surplus in part 4A_
Budget Surplus in part 4B_
ii. Explain why the fiscal deficit was not eliminated in spite of the large decrease in G of 120.
iii. What does this imply about attempts to balance the budget by reducing G when the economy is in a recession?
iv. What policy might the Fed enact to counter the effects on GDP of trying to reduce the fiscal deficit? Explain
what the Fed would do and illustrate with an IS-LM graph (no numbers are required for this answer, just a general
IS-LM graph).

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“Since you have posted multiple questions with multiple sub parts, we will provide the solution only to the first three sub parts of the first question as per Q&A guidelines. Please repost the remaining question by specifying the sub parts need to be answered”

The investment-saving (IS) and liquidity preference money supply (LM) explain the interaction between the real sector of the economy and the financial sector. The model is used to analyze the equilibrium level of national income and the interest rate in an economy. The "IS" curve in the model represents the equilibrium in the goods market, showing the combinations of interest rates and levels of national income at which total spending equals total output. On the other hand, the "LM" curve represents the equilibrium in the money market, showing the combinations of interest rates and levels of national income at which the demand for money balances is equal to the supply of money balances.

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