Consider a closed- economy IS-LM model, where C = C(YD), I = I(Y, i), and G = G. Suppose there is an increase in autonomous consumption. Show the short run effects on output and interest rate using the three figures diagrams. To answe this question, draw a diagram that includes the following three figures: A. The goods market,

Consider a closed- economy IS-LM model, where C = C(YD), I = I(Y, i), and G = G. Suppose there is an increase in autonomous consumption. Show the short run effects on output and interest rate using the three figures diagrams. To answe this question, draw a diagram that includes the following three figures: A. The goods market,

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Problem 3: IS-LM model An economy is initially described by the following equations: C=500+0.75(Y- T) I=1,000-50r M/P=Y-200R G=1,000 T=1,000 M=6,000 P=2 a. Derive and graph the IS curve and the LM curve. Calculate the equilibrium interest rerate and income. Label that point A on your graph. b. Suppose a newly elected government cuts taxes by 20 percent. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? c. Now assume that the central bank adjusts the money supply to hold the interest rate constant. What is the new equilibrium income? What must the new money supply be? What is the tax multiplier? d. Now assume that the central bank adjusts the money supply to hold income constant. What is the new equilibrium interest rate? What must the money supply be? What is the tax multiplier? e. Show the equilibria you calculated in parts (b), (c), and (d) on the graph you drew in part (a). Label them points B, C, and…
Task 3 Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) I = 400 – 15r M = 200 + Y – 100r P G = 150 T = 100 M = 2000 P = 2 Where Cis planned consumption, / is planned investment spending, Tis government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. c) The government reduces taxation to T=50 in order to boost economic activity. Assume no changes in the values of all the other variables. 1. What is the immediate increase in income before the…
COURSE: MACROECONOMICS - IS-LM MODEL Demonstrate under the assumptions of the IS-LM model the effect of having a consumption function with an exogenous component, an income-dependent part and a part that depends on the interest rate. Graph
Assume the following model of the economy: Y = C + I + G C = 120 + 0.5(Y - T) I = 100 - 10r G = 50 T = 40 Md = Y - 20 r Ms = 600 P = 2 Graph both the IS and the LM curves. Use r = 5, 10, 15 What are the equilibrium level of income and equilibrium interest rate?
You are given the following information regarding a hypothetical economy: Consumption function is C= 0.3+0.8(Y-T) Investment I=3.5- 50i G= 3 T= 2.5 The demand for real money is M/P=2+0.2Y-50i. The real stock of money is 3. Answer the following questions: Derive the IS Curve а. b. Derive the LM Curve What are the equilibrium equilibrium output and interest rate? с.
This problem asks you to analyze the IS-LM model algebraically. Suppose consumption is a linear function of disposable income: C(YT) = a + b(YT) where a > 0 and 0 0 and d > 0. (a) Solve for Y as a function of r, the exogenous variables G and T, and the model's parameters a, b, c, and d. (b) How does the slope of the IS curve depend on the parameter d, the interest rate sensitivity of investment? Refer to your answer to part (a), and explain the intu- ition. (c) Which will cause a bigger horizontal shift in the IS curve, a $100 tax cut or a $100 increase in government spending? Refer to your answer to part (a), and explain the intuition.
Task 3 Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) I= 400 – 15r M/P = 200 + Y – 100r G = 150 T = 100 M = 2000 P| =2 Where Cis planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. c) The government reduces taxation to T=50 in order to boost economic activity. Assume no changes in The values of all the other variables. 1. What is the immediate increase in income before the economy adjusts to its new equilibrium? 2. What are the economy's equilibrium level of output Y and interest rate following the cut in taxation? Compute the equilibrium level of consumption and investment spending. With the help of the IS/LM graph, carefully explain what happens to the economy following the cut in taxation. d)lf the government intends to pursue monetary policy instead of fiscal policy in…
The Tax Cuts and Jobs Act of 2017, among other things, lowered marginal tax rates across several tax brackets. During that time, the Federal Reserve raised the target for the federal funds rate. Using the IS-MP model, graphically demonstrate what should happen to the interest rate and income (real GDP) in the short run. Explain in words below your diagram.
So far we have assumed that consumption is determined by disposable income (C = C(Y-T), with the function increasing) and investment is determined by the real interest rate (I = I(r), with the function decreasing). But the real interest rate may affect households' choice between consumption and saving, and firms' sales or cash flow may influence their investment. This problem therefore asks you to consider the implications of some alternative assumptions. a. Suppose C = C(Y-T,r), with C a decreasing function of r. With this change in the model, does an increase in G increase C, decrease it, or leave it unchanged, or is it not possible to tell? b. Suppose II(Y-T,r), with I an increasing function of Y-T (and suppose that C is given by C(YT)). Does an increase in G increase I, decrease it, leave it unchanged, or is it not possible to tell? C. Suppose there are two types of investment. One (for example, the investment of large, mature firm) is determined by the real interest rate, and the…
So far we have assumed that consumption is determined by disposable income (C=C(Y-T), with the function increasing) and investment is determined by the real interest rate (I = I(r), with the function decreasing). But the real interest rate may affect households' choice between consumption and saving, and firms' sales or cash flow may influence their investment. This problem therefore asks you to consider the implications of some alternative assumptions. a. Suppose C=C(Y-T,r), with C a decreasing function of r. With this change in the model, does an increase in G increase C, decrease it, or leave it unchanged, or is it not possible to tell? b. Suppose II(Y-T,r), with I an increasing function of Y-T (and suppose that C is given by C(Y T)). Does an increase in G increase I, decrease it, leave it unchanged, or is it not possible to tell? C. Suppose there are two types of investment. One (for example, the investment of large, mature firm) is determined by the real interest rate, and the…
Consider a closed economy where the goods and money markets are described by the following relationships: C 500+ 0.8 (Y-T) I= 500 10r M P a) 0.1Y35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). mpute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. e) Suppose that, instead of relying on monetary policy, the government intends to take an active role in restoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much should government spending change by? With the help of graphs, explain very carefully, the impact of this policy on the economy. f) An…
Q1. Consider the following two-period model of consumption and saving: Utility = C1^0.5 + B*C2^0.5 C1 + C2/(1+r) = Y1 + Y2/(1+r) where Y1 = 4, Y2 = 1, r = 0.17 and B = 0.5. Find a numerical solution for period 1 consumption, C1. (State your answer to 2 decimal places.)