Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
subquestions a and b.
* for a) - need to find the IS equation, also the LM equation and the equilibrium.
![The IS/LM model.
Consider an economy where the demand for goods is given by:
Z = a₁ + a₂Y - azi,
and the demand for money is given by:
Md = bịY — bại.
The supply of money is given by M*. Assume that prices are fixed, and all firms are identical
and willing to supply any demand for goods. The parameters of the model, (ao, a1, a2, b1, b2,
M*), are all assumed to be positive.
(a) Find the equilibrium level of output for this economy.
(b) Suppose the government increases its spending by 1 unit. Which of the model's
parameters, (ao, ai, a2, b1, b2, M*), will change and why?
(c) In (b), how much does equilibrium output increase?
(d) The IS multiplier is given by
1-q₁
and provide an intuitive explanation
Show that the multiplier in (c) is less than this
as to why this is.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1b2e65f2-c472-45bf-885c-00dffce84016%2Fa928679b-7cbd-4fb5-bc45-677e43ef37bd%2Fgfmef3k_processed.png&w=3840&q=75)
Transcribed Image Text:The IS/LM model.
Consider an economy where the demand for goods is given by:
Z = a₁ + a₂Y - azi,
and the demand for money is given by:
Md = bịY — bại.
The supply of money is given by M*. Assume that prices are fixed, and all firms are identical
and willing to supply any demand for goods. The parameters of the model, (ao, a1, a2, b1, b2,
M*), are all assumed to be positive.
(a) Find the equilibrium level of output for this economy.
(b) Suppose the government increases its spending by 1 unit. Which of the model's
parameters, (ao, ai, a2, b1, b2, M*), will change and why?
(c) In (b), how much does equilibrium output increase?
(d) The IS multiplier is given by
1-q₁
and provide an intuitive explanation
Show that the multiplier in (c) is less than this
as to why this is.
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