a. Derive both the IS and LM equations for the economy and compute the Equilibrium level of Income and Interest Rate. Then compute the values of investment demand, speculative demand for money and disposal income. b. Suppose the government undertook an expansionary fiscal policy by increasing government expenditure by 20 percent and cutting lump sum tax by 20%. Clearly demonstrate how this would result in the crowding out phenomena, using the IS – LM model. Also, briefly explain how investment demand and speculative demand for money have been affected.
Consider the following equations for a small open economy for both the goods and money markets.
Goods Market: C = 2000 + 0.8Yd; T = 1000 + 0.3Y; G = 6000; TR = 1200; I = 4000 + 0.24Y – 100r; M = 3000 + 0.2Y; X = 1500;
a. Derive both the IS and LM equations for the economy and compute the Equilibrium level of Income and Interest Rate. Then compute the values of investment
b. Suppose the government undertook an expansionary fiscal policy by increasing government expenditure by 20 percent and cutting lump sum tax by 20%. Clearly demonstrate how this would result in the crowding out phenomena, using the IS – LM model. Also, briefly explain how investment demand and speculative demand for money have been affected.
c. Ceteris paribus suppose the government instead decided increase money supply by 35%. Using the IS-LM model, show how this policy results in the crowding in phenomena. Also, briefly explain how investment demand and speculative demand for money have been affected.
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