Consider an IS-LM model where the central bank sets the nominal interest rate. The consumption and investment functions are given by C = 200 + 0.25(Y – T) I = 150 + 0.25Y - 1000i. and suppose that government expenditures and taxes are given by G = 250 and T = 200. respectively. Let real money demand be given by MIP = 2Y - 8000i, and let the initial interest rate be io = 0.05. (a Solve for the equilibrium values of output and real money supply. (b). and government expenditures indeed add up to output Y. Solve for the equilibrium values of C and I, and verify that consumption, investment 0.03. Solve for the new equilibrium values of Y, MIP. C and I. What are the effects of this change on the economy? Provide brief (c) Now suppose that interest rate is cut to ig = intuition.
Consider an IS-LM model where the central bank sets the nominal interest rate. The consumption and investment functions are given by C = 200 + 0.25(Y – T) I = 150 + 0.25Y - 1000i. and suppose that government expenditures and taxes are given by G = 250 and T = 200. respectively. Let real money demand be given by MIP = 2Y - 8000i, and let the initial interest rate be io = 0.05. (a Solve for the equilibrium values of output and real money supply. (b). and government expenditures indeed add up to output Y. Solve for the equilibrium values of C and I, and verify that consumption, investment 0.03. Solve for the new equilibrium values of Y, MIP. C and I. What are the effects of this change on the economy? Provide brief (c) Now suppose that interest rate is cut to ig = intuition.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Consider an IS-LM model where the central bank sets the nominal interest rate. The consumption
and investment functions are given by
C = 200 + 0.25(Y - T)
I = 150 + 0.25Y – 1000i.
and suppose that government expenditures and taxes are given by G = 250 and T = 200.
respectively. Let real money demand be given by
MIP = 2Y – 8000i,
and let the initial interest rate be ig = 0.05.
Solve for the equilibrium values of output and real money supply.
(b)
Solve for the equilibrium values of C and I, and verify that consumption, investment
and government expenditures indeed add up to output Y.
(c)
Now suppose that interest rate is cut to ig = 0.03. Solve for the new equilibrium
values of Y, M/P, C and I. What are the effects of this change on the economy? Provide brief
intuition.
(d)"
Set the interest rate back to ig = 0.05. Now suppose that govermment spending
increases to G = 400. If the central bank keeps the interest rate unchanged, how should monetary
supply respond to this expansionary fiscal policy? What are the effects of this fiscal expansion on Y
and C? Explain.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F503295eb-7de2-444d-b8dc-0fd2a4d66beb%2F482225f5-daf3-46bf-8b98-500d404492e1%2Fijdmcob_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Consider an IS-LM model where the central bank sets the nominal interest rate. The consumption
and investment functions are given by
C = 200 + 0.25(Y - T)
I = 150 + 0.25Y – 1000i.
and suppose that government expenditures and taxes are given by G = 250 and T = 200.
respectively. Let real money demand be given by
MIP = 2Y – 8000i,
and let the initial interest rate be ig = 0.05.
Solve for the equilibrium values of output and real money supply.
(b)
Solve for the equilibrium values of C and I, and verify that consumption, investment
and government expenditures indeed add up to output Y.
(c)
Now suppose that interest rate is cut to ig = 0.03. Solve for the new equilibrium
values of Y, M/P, C and I. What are the effects of this change on the economy? Provide brief
intuition.
(d)"
Set the interest rate back to ig = 0.05. Now suppose that govermment spending
increases to G = 400. If the central bank keeps the interest rate unchanged, how should monetary
supply respond to this expansionary fiscal policy? What are the effects of this fiscal expansion on Y
and C? Explain.
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