Consider a closed economy where the goods and money markets are described by the following relationships:C = 200 + 0.9(Y – T)| = 400 – 15rM= 200 + Y – 100rPG = 150T = 100M = 2000P = 2Where C is planned consumption, I is planned investment spending, Tis government tax revenues, G isgovernment 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 tworelationships.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 actuallevel 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 thevalues of all the other variables.1.What is the immediate increase in income before the economy adjusts to its new equilibrium?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/LMgraph, carefully explain what happens to the economy following the cut in taxation.2.

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Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) | = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 М 3 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.

Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) | = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 М 3 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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