Consider the following short-run, closed economy model of the economy.Goods MarketC = 50 + 0.5(Y – T)I = 150 – 10r ; NX = -200G = 150 ; T = 100 Money MarketM = 20,000P = 100L(Y, r) = Y – 50rFind the equilibrium values of r and y.Assume the natural rate of output is Y̅ = 210, individuals do not hold currency (cr = 0), and the reserve requirement is 10% (rr = 0.1). If the Fed desires to return the economy to its natural level, what should they do with reserves (R) and the money supply (M)? Show the effect on your graph in part A. What is the new equilibrium real interest rate?Ignore Part B. Policymakers plan to balance the budget by decreasing G. What is the size of the Keynesian-Cross government spending multiplier and the horizontal shift of the IS curve? What are the resulting IS-LM equilibrium values of r and Y after the shift? What is the size of the effective (actual) government spending multiplier? Why is it smaller?If you did parts B and C correctly, then r* < 0. Is this possible? If so, explain how.At the equilibrium in part A, what is the value of national savings (S = Y – C – G)? Investment? Show the results using a graph for the market of loanable funds. Is that market in equilibrium? Explain.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the following short-run, closed economy model of the economy.

Goods Market

C = 50 + 0.5(Y – T)

I = 150 – 10r ; NX = -200

G = 150 ; T = 100

Money Market

M = 20,000

P = 100

L(Y, r) = Y – 50r

Find the equilibrium values of r and y.
Assume the natural rate of output is Y̅ = 210, individuals do not hold currency (cr = 0), and the reserve requirement is 10% (rr = 0.1). If the Fed desires to return the economy to its natural level, what should they do with reserves (R) and the money supply (M)? Show the effect on your graph in part A. What is the new equilibrium real interest rate?
Ignore Part B. Policymakers plan to balance the budget by decreasing G. What is the size of the Keynesian-Cross government spending multiplier and the horizontal shift of the IS curve? What are the resulting IS-LM equilibrium values of r and Y after the shift? What is the size of the effective (actual) government spending multiplier? Why is it smaller?
If you did parts B and C correctly, then r* < 0. Is this possible? If so, explain how.
At the equilibrium in part A, what is the value of national savings (S = Y – C – G)? Investment? Show the results using a graph for the market of loanable funds. Is that market in equilibrium? Explain.

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