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Consider the IS-LM model and suppose that the economy of Fantasyland can be characterised by the following relations (all units are in millions of domestic currency). Solve the numerical exercises. If necessary, round up to second decimal digit. Provide the detailed derivation for each answer and a textual description. When required to graph the model, you can - for instance - draw it by hand or using PowerPoint. C = 200 +0.25 YD I = 150 +0.25Y - 1200i T = 150 G = 250 M/P = 2Y - 6000i a. Derive the IS relation and draw it on a diagram with corresponding labels b. The central bank sets the policy rate at 5%. What is the level of real money supply when the interest rate is 5%? Draw the LM curve: is it horizontal or upward-sloping? c. Find the equilibrium level of Consumption and Investment, and verify the value you obtained for the GDP by summing up its components.

Consider the IS-LM model and suppose that the economy of Fantasyland can be characterised by the following relations (all units are in millions of domestic currency). Solve the numerical exercises. If necessary, round up to second decimal digit. Provide the detailed derivation for each answer and a textual description. When required to graph the model, you can - for instance - draw it by hand or using PowerPoint. C = 200 +0.25 YD I = 150 +0.25Y - 1200i T = 150 G = 250 M/P = 2Y - 6000i a. Derive the IS relation and draw it on a diagram with corresponding labels b. The central bank sets the policy rate at 5%. What is the level of real money supply when the interest rate is 5%? Draw the LM curve: is it horizontal or upward-sloping? c. Find the equilibrium level of Consumption and Investment, and verify the value you obtained for the GDP by summing up its components.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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f. Now keep the increase in government spending, G = 400, and assume real money supply is fixed as in point (b). Compare the effect of the fiscal stimulus here and at point (e)
Transcribed Image Text:f. Now keep the increase in government spending, G = 400, and assume real money supply is fixed as in point (b). Compare the effect of the fiscal stimulus here and at point (e)
Consider the IS-LM model and suppose that the economy of Fantasyland can be characterised by the following relations (all units are in millions of domestic currency). Solve the numerical exercises. If necessary, round up to second decimal digit. Provide the detailed derivation for each answer and a textual description. When required to graph the model, you can - for instance - draw it by hand or using PowerPoint. C = 200+ 0.25 YD I = 150+ 0.25Y - 1200i T = 150 G = 250 M/P = 2Y - 6000i a. Derive the IS relation and draw it on a diagram with corresponding labels b. The central bank sets the policy rate at 5%. What is the level of real money supply when the interest rate is 5%? Draw the LM curve: is it horizontal or upward-sloping? c. Find the equilibrium level of Consumption and Investment, and verify the value you obtained for the GDP by summing up its components. d. Now, suppose that the central bank cuts the interest rate to 3%. Has the money supply changed? Calculate and describe this policy action's effect on Y, I, and C. Graph the new relations and equilibrium values. e. Return to the original interest rate and imagine the government rises spending to 400. Describe the effect of this policy on Y, I, C, and the real money supply. Graph the new conditions and equilibrium values.
Transcribed Image Text:Consider the IS-LM model and suppose that the economy of Fantasyland can be characterised by the following relations (all units are in millions of domestic currency). Solve the numerical exercises. If necessary, round up to second decimal digit. Provide the detailed derivation for each answer and a textual description. When required to graph the model, you can - for instance - draw it by hand or using PowerPoint. C = 200+ 0.25 YD I = 150+ 0.25Y - 1200i T = 150 G = 250 M/P = 2Y - 6000i a. Derive the IS relation and draw it on a diagram with corresponding labels b. The central bank sets the policy rate at 5%. What is the level of real money supply when the interest rate is 5%? Draw the LM curve: is it horizontal or upward-sloping? c. Find the equilibrium level of Consumption and Investment, and verify the value you obtained for the GDP by summing up its components. d. Now, suppose that the central bank cuts the interest rate to 3%. Has the money supply changed? Calculate and describe this policy action's effect on Y, I, and C. Graph the new relations and equilibrium values. e. Return to the original interest rate and imagine the government rises spending to 400. Describe the effect of this policy on Y, I, C, and the real money supply. Graph the new conditions and equilibrium values.
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