Consider an IS-LM model where the central bank sets the nominal interest rate. The consumptionand investment functions are given byC = 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 byMIP = 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, investmentand government expenditures indeed add up to output Y.(c)Now suppose that interest rate is cut to ig = 0.03. Solve for the new equilibriumvalues of Y, M/P, C and I. What are the effects of this change on the economy? Provide briefintuition.(d)"Set the interest rate back to ig = 0.05. Now suppose that govermment spendingincreases to G = 400. If the central bank keeps the interest rate unchanged, how should monetarysupply respond to this expansionary fiscal policy? What are the effects of this fiscal expansion on Yand C? Explain.

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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 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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