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 = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, / 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. 1. 2. 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) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. What is the immediate impact on income before the economy adjusts to its new equilibrium? What are the economy's equilibrium level of output Y and interest rate r following the fall in autonomous consumption? 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 fall in consumer confidence.
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 = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, / 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. 1. 2. 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) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. What is the immediate impact on income before the economy adjusts to its new equilibrium? What are the economy's equilibrium level of output Y and interest rate r following the fall in autonomous consumption? 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 fall in consumer confidence.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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
b)
P
= 0.1Y - 35r
G = 800
T = 200
1.
2.
M
Where C is planned consumption, / 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.
= 1000
P = 2
a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two
relationships.
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) Due to some negative news concerning the impact of global warming on the economy, consumers are
becoming more pessimistic about the future to the point of reducing autonomous consumption by 50.
What is the immediate impact on income before the economy adjusts to its new equilibrium?
What are the economy's equilibrium level of output Y and interest rate r following the fall in
autonomous consumption? 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 fall in
consumer confidence.
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