Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as: C = 500 + 0.75(Y - T) I = 1000 - 300? G = 1000 T = 1200 MD = 0.5Y - 200r M = 5000 P = 2 (a) Write down the equations for the IS curve and LM curve. Show your workings. (b) Solve for the short-run equilibrium output and interest rate. (c) Suppose government purchases falls, with ΔG=-175. (i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.) (ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer.
Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as:
C = 500 + 0.75(Y - T)
I = 1000 - 300?
G = 1000
T = 1200
MD = 0.5Y - 200r
M = 5000
P = 2
(a) Write down the equations for the IS curve and LM curve. Show your workings.
(b) Solve for the short-run equilibrium output and interest rate.
(c) Suppose government purchases falls, with ΔG=-175.
(i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.)
(ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer.
(e) Suppose the price level falls. Using an appropriate IS-LM diagram, illustrate the short-run impact of the fall in price level on the equilibrium interest rate and output. No written explanation is required.
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