### Understanding Economic Equilibrium: A Case StudyIn this case study, we examine the economic equilibrium using a hypothetical economy described by the following equations:**Consumption Function:**\[ C = 500 + 0.75 (Y - T) \]Where:- $ C $ is consumption- $ Y $ is income- $ T $ is taxes**Investment Function:**\[ I = 1000 - 50r \]Where:- $ I $ is investment- $ r $ is the interest rate**Money Market Equilibrium Condition:**\[ \frac{M}{P} = Y - 200r \]Where:- $ M $ is the money supply- $ P $ is the price level**Government Expenditure:**\[ G = 1000 \]**Taxes:**\[ T = 1000 \]**Money Supply:**\[ M = 6000 \]**Price Level:**\[ P = 2 \]### Questions:**a. Derive the IS and LM equations. Calculate the equilibrium interest rate and level of income.****b. Suppose that taxes are cut by 20% and the money supply is held constant. What are the new equilibrium interest rate and level of income?****c. Suppose that the Federal Reserve changes the money supply to hold the interest rate constant. What is the new level of income? What must the new money supply be?****d. Suppose the Federal Reserve changes the money supply to hold the level of income constant. What is the new equilibrium interest rate? What must the money supply be?**By exploring these questions, students can gain a deeper understanding of how fiscal and monetary policies impact the equilibrium in an economy, and how different variables interact within the IS-LM framework.

IS-LM Model: One of the main macroeconomic model, which name is IS-LM model. This models assists…

and the LM equations. Calculate the equilibrium interest ra taxes are cut by 20% and the money supply is held constant interest rate and level of income? that the Federal Reserve changes the money supply to hold t. What is the new level of income? What must the new mo

and the LM equations. Calculate the equilibrium interest ra taxes are cut by 20% and the money supply is held constant interest rate and level of income? that the Federal Reserve changes the money supply to hold t. What is the new level of income? What must the new mo

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Are the following statements True, False or Uncertain? Justify you answer for each of the statements. If the government increases both Tax and Expenditure by equal amount, then there will be no increase in income in the Keynesian model. If money demand does not depend on interest, them LM curve is vertical.
Illustrate and explain how the economy can move from points C or D to equilibrium point E, ceteris paribus. Be sure to use the Total Spending / 45° graph, the investment demand curve and the money market diagram to answer this question. Interest rate LM D\ IS Y
Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 15 24 0 0 300 600 Money Supply 900 Money Demand 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars) Money Demand -0- Money Supply The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. INTEREST RATE…
If people suddenly wish to hold more money at each interest rate : a. the money demand curce will shift to the right b. the LM curve will shift upward (to the left) c. Real income will fall d. All of the above
The graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to $3.9 trillion. Draw a new MS curve that shows the effect of the Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of money, the equilibrium interest rate is percent a year. After the Fed decreases the quantity of money, at an interest rate of 4 percent a year, people want to hold money than the quantity supplied, so they bonds. A. more; sell B. less; buy C. less; sell D. more; buy The price of a bond A. falls; falls O B. rises; falls and the interest rate 8- 7- 6- 5- 4- 3- 2- 1- Nominal interest rate (percent per year) 4 0+ 3.8 MS 4.0 MD 4.0 4.1 3.9 Quantity of money (trillions of 2009 dollars) >>> Draw only the objects specified in the questi 4.2
An increase in the nominal interest rate would O a. encourage people to hold smaller money balances. O b. encourage people to hold larger money balances. O c. force the Fed to reduce the money supply. d. cause the real interest rate to decline.
In the country of Juventus, the money supply is equal to $52 (bilion), the velocity of circulation is 5, and real GDP is $100 (bilion) a. What is the price level in Juventus, and what is the valur of its nominal GDP? Round your price level to 2 decimal places Price level Nominal GDP b. If money supply increases by 20 percent, what will be the new values of the price level and nominal GDP, assuming that Vand real GDP remain constant? Round your price level to 2 decmal olaces Price levet Nominal GDP c What does this suggest about the connection between money supply atnd price level? The relationship between money supply and price level in this case is Cick to select)
Using the theory of liquidity preference what effect does an increase in the money supply has on the real interest rate Select one O a. An increase in the money supply shits the supply of real money balances to the right leading to an decrease in the interest rate to regain equitum OD an increase in the money supply has no effect on the interest rate because prices are still fed @cAn increase in the money supply shifts the demand for real money balances to the right leading to an increase in the interest rate to regain equarium O d. An increase in the money supply shifts the supply of real money balances to the right leading to an increase in the interest rate to regain equilibrium
The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. 12 Money Supply 10 1 Money Demand 2 0 0 20 40 60 80 MONEY (Billions of dollars) INTEREST RATE (Percent) 100 120 Money Demand Money Supply ?
• Given following information: Y = 4000 - 200i The IS equation Ms/P = 2000 Vertical LM • Calculate equilibrium interest rate and GDP? Suppose Fed uses easy monetary policy and increase the money supply to $3000. Calculate new equilibrium interest rate and GDP? Is this policy effective? 2- Suppose following information: Y = 2000 Vertical IS Y = 1000 + 100i The LM equation !! Calculate equilibrium interest rate and GDP? Suppose Fed uses easy monetary policy and increase the money supply to Y = 1500 +100i. Calculate new equilibrium interest rate and GDP? Is this policy effective? !!
For the next 5 questions, assume that the economy starts in equilibrium: -the output is 1 million -the equilibrium price of a one-year, $100 bond is $96 -the money supply is 1 trillion -the price level is 125 What is the interest rate in this economy? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a 4.67% b 4.00% 5.03% d. 4.17%
Figure 21. The graph on the left shows a money market with the interest rate on the vertical axis and the quantity of money on the horizontal axis. The graph on the right is related to the money market graph and shows an aggregate demand (AD) with the price level on the vertical axis and quantity of output on the horizontal axis "2 "1 MS MD2 MD₁ 1 P₂ P₁ AD 1₂ ₁ Refer to Figure 21. The changes on the two graphs are related. Which of the following is a correct explanation of the movement of the economy from point Y1 to point Y2. The Federal Reserve's expansionary monetary policy shifts the demand for money from MD1 to MD2. The resulting increase in the interest rate causes Y to decrease from Y1 to Y2. The rise of the price level from P1 to P2 leads to an increase in the demand for money represented by the rightward shift of the money demand curve from MD1 to MD2. The resulting rise of the interest rate causes Y to decrease from Y1 to Y2. A fall in the price level from P2 to P1 causes an…