Consider the following short-run IS-LM model. Assume the central bank targets the nominal interest rate and expected inflation is zero. C = 300 + .50YD I = 1000 + .10Y – 5000i G = 700 T = 600 M/P = 100 + .25Y - 6250i P = 1 i = .06 Y-T = YD Solve for the IS equation and the LM equation.Find the equilibrium and also show it on a graph of IS-LM.Find the equilibrium values for C, I, and the money supply M.Consider a fiscal stimulus: what is the impact on Y if G rises by 100? What is the impact on I in this case?What is the impact on the interest rate and the money supply?Return to your original analysis. Consider a monetary stimulus where the central bank sets a new target interest rate, i = .04. Find the new equilibrium values for Y, C, and I.Find and discuss any change in the money supply.What causes the change in I in this case? Explain.

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Answered: Consider the following short-run IS-LM…

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 IS-LM model. Assume the central bank targets the nominal interest rate and expected inflation is zero.

C = 300 + .50Y_D

I = 1000 + .10Y – 5000i

G = 700

T = 600

M/P = 100 + .25Y - 6250i

P = 1

i = .06

Y-T = Y_D

Solve for the IS equation and the LM equation.
Find the equilibrium and also show it on a graph of IS-LM.
Find the equilibrium values for C, I, and the money supply M.
Consider a fiscal stimulus: what is the impact on Y if G rises by 100? What is the impact on I in this case?
What is the impact on the interest rate and the money supply?
Return to your original analysis. Consider a monetary stimulus where the central bank sets a new target interest rate, i = .04. Find the new equilibrium values for Y, C, and I.
Find and discuss any change in the money supply.
What causes the change in I in this case? Explain.

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