An economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. 1. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, find the new expenditure. 2. graph the change in the IS curve. Label axes and curves, project the new and the old values on respective axes. 3. How will the IS curve be affected? a. slide down along the IS curve b. slide up along the IS curve c. shift of the IS curve right d. shift of the IS curve left
An economy's IS curve represents the following markets.
Goods:
slc = 4
MPC = 0.7
G = 10
T = 9
Finance:
I = 10 - 90r
and r = 0.047
Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12.
1. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, find the new expenditure.
2. graph the change in the IS curve. Label axes and curves, project the new and the old values on respective axes.
3. How will the IS curve be affected?
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Now we're adding an LM curve to the economy from Question 1.
The
M/P = 0.02 / (r - Y/10,300)^2
M = 22
P = 2
We continue with the fiscal expansion scenario, with G0=10 and G1=12. Draw a new graph that includes the LM curve and both the IS curves. Show how at the same old unchanged r = 0.047 the volume of transactions supported by the money market is lower than the expenditure afforded by the goods and financial markets. That is, map r=0.047 into the expenditure you found in Question 2, Y1, and into the original volume of transactions, Y0.
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