An economy is as follows Goods market: slc=5 MPC=0.72 G=20, T=18 Financial market: I 18 200r Money market 0.02 M P Y (r. 5000 M=40, P=2 2 (a) Write down the expressions that describe the two markets for the IS curve. From them, derive the expression for the IS curve. (b) Express the LM curve for Y - so that all other terms are on the right-hand side. (c) Government spending increases to G₁ = 22. Before the markets react and adjust the interest rate from r = 4.65%, find the disequilibrium expenditure and volume of transactions
An economy is as follows Goods market: slc=5 MPC=0.72 G=20, T=18 Financial market: I 18 200r Money market 0.02 M P Y (r. 5000 M=40, P=2 2 (a) Write down the expressions that describe the two markets for the IS curve. From them, derive the expression for the IS curve. (b) Express the LM curve for Y - so that all other terms are on the right-hand side. (c) Government spending increases to G₁ = 22. Before the markets react and adjust the interest rate from r = 4.65%, find the disequilibrium expenditure and volume of transactions
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 3. The very short run: IS/LM
An economy is as follows
Goods market:
slc=5
MPC=0.72
G=20, T=18
Financial market:
I 18 200r
Money market
0.02
M
P
Y
(r-
5000
Answers provided.
3. (c) 81.2, 74 (d) r↑
2
M=40, P=2
(a) Write down the expressions that describe the two markets for the IS curve. From them,
derive the expression for the IS curve.
(b) Express the LM curve for Y - so that all other terms are on the right-hand side.
(c) Government spending increases to G₁ = 22. Before the markets react and adjust the interest
rate from r = 4.65%, find the disequilibrium expenditure and volume of transactions
(d) Graph the IS/LM from your previous answer. Label axes, curves, and the disequilibrium
values. Explain briefly what will happen in the short-term equilibrium.
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