Assume the following IS-LM model: expenditure sector: money sector: AD = C + I + G + NX I = 300 - 20i M = 700 C = 100 + (4/5)YD G = 120 P = 2 YD = Y - TA NX = -20 md = (1/3)Y + 200 - 10i TA = (1/4)Y a. Derive the equilibrium values of consumption (C) and money demand (md). b. How much investment (I) will be crowded out if the government increases its purchases by DG = 160 and nominal money supply (M) remains unchanged? c. By how much will the equilibrium level of income (Y) and the interest rate (i) change, if the Fed responds to this increase in government purchases by increasing nominal money supply to M' = 1,100?

Assume the following IS-LM model: expenditure sector: money sector: AD = C + I + G + NX I = 300 - 20i M = 700 C = 100 + (4/5)YD G = 120 P = 2 YD = Y - TA NX = -20 md = (1/3)Y + 200 - 10i TA = (1/4)Y a. Derive the equilibrium values of consumption (C) and money demand (md). b. How much investment (I) will be crowded out if the government increases its purchases by DG = 160 and nominal money supply (M) remains unchanged? c. By how much will the equilibrium level of income (Y) and the interest rate (i) change, if the Fed responds to this increase in government purchases by increasing nominal money supply to M' = 1,100?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter23: The Aggregate Expenditure Model

Section: Chapter Questions

Problem 10P

See similar textbooks

Related questions

Q: Investment = 450 Consumption = 700 + 0.7Yd Government expenditure= 500 Taxes = 350 Export = 400…

A: Hello. Since you have posted multiple parts of the question and not specified which part of the…

Q: Assume the following model of the economy: Y = C + I + G C = 120 + 0.5(Y - T) I = 100 - 10r G =…

A: Given; C = 120 + 0.5(Y - T) I = 100 - 10r G = 50 T = 40 Md = Y - 20 r Ms = 600 P = 2

Q: Question Four Assume the following IS-LM model: Expenditure Sector AD = C + I + GC = 130+ (4/5) YD…

A: The objective of this question is to show the IS and LM schedules, find equilibrium levels of income…

Q: Suppose that the following system of equations describe the macroeconomy of a hypothetical country:…

A: IS: Y= C(y)+I(i)+G LM: M/p=L(i,y) Marginal propensity to consume=5/6 Tax rate=0.25 Interest…

Q: Aggregate Demand (AD) Curve shows the relationship between the economy’s price level and real GDP…

A: The AD curve is downwards sloping which indicates that keeping other things or factors constant, a…

Q: (4)Use the graphical framework of the IS/LM model and show the impact of the following on aggregate…

A: IS-LM Model: The IS-LM is a macroeconomic model In which the IS is the investment saving curve. It…

Q: Assume the following model of the economy C = 60 + 0.75(Y – T) I = 45 – 5r G = 40 and T = 40 M$ =…

A: IS - LM curves refers that investment savings-liquidity preference-money supply , these curves show…

Q: A closed economy is described by the following system of equations: L(Y,i) = 5Y -40i C = 40+0.5YD T…

A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and…

Q: Consider the economy of Panda Republic which is characterized by the following IS-LM model. S…

A: A) The fall in consumer confidence would decrease aggregate consumption. As per Graph the IS curve…

Q: Consider an economy with the following features: Consumption, C = 130 + 0.5Yd Income tax, T =…

Q: Assume the following IS-LM model: Expenditure sector: Money sector: C = 100 + (4/5)YD I = 300 - 20i…

A: Given C = 100+(4/5) YD G = 120 I-= 300-20i TA= (1/4) Y NX = -20 M = 700 P = 2 Md = (1/3) Y+200-10i

Q: Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate…

A: Aggregate demand: The quantity of products and services sought in an economy at a particular price…

Q: Goods Market Money market C = 200 + (4/5)YD TA = (1/8)Y - 40 Money Supply => ms = 400 Money Demand…

A: Given Goods Market Consumption (C)= 200 + (4/5)YD Consumption (C)= 200 + 0.8YD Tax (TA) = (1/8)Y -…

Q: Consider this frugal ungoverned closed economy with a money market. C = 100 + 0.3Y Id = 700 – 200r…

A: Equilibrium will occur when IS equation equates with LM equation.

Q: In the IS/LM model, the IS curve maps interest rates and saving maps spending and income…

A: The acronym for the IS-LM model is investment-savings (IS) and liquidity preference money supply…

Q: I. Suppose the Fed creates a new electronic dollar. This new system allows everyone to make and…

A: In the IS-LM model, IS curve shows equilibrium in the goods market and the LM curve shows…

Q: Consider a closed economy where the goods and money markets are described by the following…

A: Provided information: The consumption function of the economy- C = 500 + 0.8 (Y - T) Invest…

Q: Question 17 – Question 20: In this question, interest rate and prices are held fixed, and the…

A: Goods market is in equilibrium when aggregate demand and aggregate supply are equal. Where AD has…

Q: Assume you have the following model of the expenditure sector:AD = C + I + G + NX C = Co + cYD YD =…

A: The responsiveness of expenditure due to a change in income is the expenditure multiplier. The…

Q: Consider the extended IS-LM model analyzed a) Graphically analyze the effect of an increase in the…

A: IS-LM: The IS-LM is a macroeconomic model that represents when the money and product markets…

Q: Refer to the diagrams. The numbers in parentheses after the AD₁, AD2, and AD3 labels indicate the…

A: Money supply and AD have a positive relationship, When money supply is increased, aggregate demand…

Q: Problems & Questions: shosn ach gue a. Derive and state the equations for the IS and LM curves, and…

A: The macroeconomic model of IS-LM establishes a relation between national income and interest rate…

Q: Given the following equations and assuming these equations accurately describe the economy: C = 400…

Q: The total expenditure in Macroland begins with these initial levels (in trillions of dollars):…

A: Multiplier = 1 / [1 - MPC] Decline in GDP = Decline in investment * Multiplier

Q: Consider the following equations for the IS-LM framework. C = 100 + 0.8(1 – t)Y (consumption) - I =…

A: S curve equation : LM curve equation :

Q: Assume the following IS-LM model: expenditure sector:…

A: The GDP of a nation can be expressed as: By putting the respective values from the question, the…

Q: Keynesia: Government expenditure 400 Exports 250 Autonomous imports 50 Autonomous consumption…

A: "Since you have posted a question with multiple sub-parts, we will solve the first three subparts…

Q: Assume the following model of the expenditure sector: S=C+I+G+Nx TR=100 C=420+(4/5)YD I=160 G=180…

A: In the expenditure model, Y = C + I + G + NX , since the values are given: Y= 420 + (4/5)[Y –(1/6)Y…

Q: Simple Keynesian Model (i.e., the income-expenditure model). Assume: C = 150 + 0.9 DI…

A: The equilibrium occurs where aggregate demand and aggregate supply are equal. The level of income is…

Q: Consider an economy that is characterized by the following equations: C = 150 + 0.65(Y – T) – 200r T…

A: Aggregate demand measures the overall amount of demand for all finished product and services created…

Q: Consider an economy described by the IS-LM model. You are given the following data: MPC = 0.6, C * =…

A: Goods market is in equilibrium where Y=AE And money market is in equilibrium where real money…

Q: An economy is described by the following equations: C= 1500 + 0.75(Y - T) po = 800 G= 1500 X = 100…

Q: Assume the following IS-LM model: expenditure sector:…

A: The GDP of a nation can be expressed as: By putting the respective values from the question, the…

Q: Explain in words how investment multiplier and the interest sensitivity of aggregate demand affect…

A: Investment multiplier describes how many times an increase in output or income exceeds an increase…

Q: Assume the following IS-LM model: Expenditure sector: C = 100 + (4/5)YD G = 120 I = 300 -…

Q: This will be a graph shifting question, which asks about the intuition of both the AD-AS figures and…

A: AD-AS model is laid out in Price -GDP space whereas investment -saving in interest rates-GDP space .…

Question

Assume the following IS-LM model:

expenditure sector: money sector:

AD = C + I + G + NX I = 300 - 20i M = 700

C = 100 + (4/5)YD G = 120 P = 2

YD = Y - TA NX = -20 md = (1/3)Y + 200 - 10i

TA = (1/4)Y

a. Derive the equilibrium values of consumption (C) and money demand (md).

b. How much investment (I) will be crowded out if the government increases its purchases by DG = 160 and nominal money supply (M) remains unchanged?

c. By how much will the equilibrium level of income (Y) and the interest rate (i) change, if the Fed responds to this increase in government purchases by increasing nominal money supply to M' = 1,100?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 13 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Use the following versions of the IS-LM model to answer all sections: Question: a. Determine the IS function and its slope. b. Determine the LM function and its slope.
A closed economy is described by the following system of equations: C = 40+0.5YD L(Y.i) = 5Y - 40i M =100 P =1 T =G= 20 I = = 200– 20i a) Derive the equations of the IS and LM curves and determine the equilibrium income and the equilibrium interest rate. b) The state increases VAT tax by a certain rate. How are the equilibrium income and interest rate affected by this measure? Explain and show graphically. c) If there is a rise in a marginal propensity to save, what happens to the multiplier and equilibrium income? d) Explain how interest rate differentials between countries can affect the exchange rate.
Consider the extended IS-LM model analyzed a) Graphically analyze the effect of an increase in the risk premium on demand in the goods market, the IS curve and equilibrium production. Explain briefly. b) If there is no change in fiscal and monetary policy, what will the effects be on consumption and investment? Explain briefly. c) How should fiscal policy react to offset the effect of the rising risk premium on the equilibrium level of production? Suppose there is no change in monetary policy. Represent graphically using IS curves and LM and briefly explain
Consider an economy with the following features: Consumption, C = 130 + 0.5Yd Income tax, T = 20 + 0.2Y Investment, I = 200 – 600r Government expenditure, G = 112 Real money demand, Md/P = 50 + 0.5Y – 600r Nominal money supply, Ms = 600 Price level, P = 2 where Yd stands for disposable income, and r for the rate of interest. Derive the IS and LM equations. Calculate the equilibrium levels of income and rate of interest.
The total expenditure in Macroland begins with these initial levels (in trillions of dollars): autonomous consumption=1, Investment = 2; Net Exports = 0, T=2, and MPC = 0.75. Assume that equilibrium has been achieved. Suddenly there is an external shock and as a result investment goes down to 1. What is the change in GDP? Use the base model to answer this question. Equilibrium GDP goes down by 1 Equilibrium GDP goes up by 1 Equilibrium GDP goes up by 4 Equilibrium GDP goes down by 4
Do not type in dollar signs or round any of your answers. IS-LM Problem. Given the following equations and assuming these equations accurately describe the economy: C = 400 + 0.75(Y – T) | = 1,000 - 150r G = 400 and T= 400 = 350 P = 1 (fixed) (M/P)D = 0.25Y – 50r where C = consumption spending, Y = Income = Output, I = investment spending, G = government spending, T = net taxes, Ms = money supply, P = price level, r = the interest rate, and (M/P)D = real money demand Derive the IS and LM equations and use them to calculate equilibrium values for the interest rate and income (you are encouraged to sketch a graph on your scratch paper to help you work through the analysis). Equilibrium interest rate (r) percent Equilibrium income (Y) = $ Suppose government spending is increased from 400 to 500 with no change in taxes. Derive the new IS equation and calculate the new equilibrium values. Equilibrium interest rate (r) percent Equilibrium income (Y) = $ The amount of income crowded out…
I. Suppose the Fed creates a new electronic dollar. This new system allows everyone to make and receive instant payments with minimal fees. What impact would this have in the IS-LM model? In particular, explain how it would affect consumption and investment. II. Consider an economy described by the IS-LM model. MPC = 0.6, C* = 10 AE = Y G = 75,T = 60 I(r) = 500 – 1200r M = 250, P = 5 k(r)Y = 0.1Y – 10r a) Write the planned expenditure function and solve for equilibrium output as a function of the interest rate (the IS curve). b) Using the money demand function, solve for equilibrium output given the interest rate in the money market (the LM curve). c) Using the IS and LM curves, derive equilibrium output and the interest rate.
Assume the following model of the expenditure sector: S=C+I+G+Nx TR=100 C=420+(4/5)YD I=160 G=180 Nx=-40 YD=Y+TR-TA TA=(1/6)Y If the government would like to increase the equilibrium level of output (Y) to the full employment level Y*=2,700, by how much should government purchases (G) be changed?
Question 17 – Question 20: In this question, interest rate and prices are held fixed, and the economy can be described by the income-expenditure model. Consumption: C = 190 + 0.8YD; where YD = disposable income Investment: I = 180 – 50i, where i = 0.1 (10% & it is held fixed) Government spending: G = 183 Taxes: T = 272 Transfers: TR = 57 Exports: X = 18 Imports: IM = 24 Question 17 If the current level of output is 1975, find the levels of national savings and unplanned investment. Be sure to show your work rounded your answer to 2 decimal places if necessary
Consider an economy described by the IS-LM model. You are given the following data: MPC = 0.6, C * = 10 AE = Y G = 75,T = 60 I(r) = 500 – 1200r M = 250, P = 5 - k(r)Y = 0.1Y – 10r (A) Write out the planned expenditure function and solve for equilibrium output as a function of the interest rate (the IS curve). (B) Using the money demand function, solve for equilibrium output given the interest rate in the money market (the LM curve). (C) Using the IS and LM curves, derive equilibrium output and the interest rate.
Part B: Aggregate Demand (AD) Curve shows the relationship between the economy’s price level and real GDP demanded. In other words, real GDP demanded by different groups of buyers, i.e., Consumers (C), Businesses (I), Government (G), and Net Amount by Foreigners (Export - Import), at different price levels give us points on a graph, which are connected to form a curve called AD curve. Review the textbook chapter, and conduct internet research to discuss determinants of AD or factors that shift AD curve.
Part B: Aggregate Demand (AD) Curve shows the relationship between the economy’s price level and real GDP demanded. In other words, real GDP demanded by different groups of buyers, i.e., Consumers (C), Businesses (I), Government (G), and Net Amount by Foreigners (Export - Import), at different price levels give us points on a graph, which are connected to form a curve called AD curve. Review the textbook chapter, and conduct internet research to discuss determinants of AD or factors that shift AD curve.