Answered: Question Four Assume the following…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question Four Assume the following IS-LM model: Expenditure Sector AD = C + I + GC = 130+ (4/5) YD YD = Y-TT = 100+1/4Y1 = 300-20i G = 150 Where, Ms = Real Money Supply Md Real Money Demand C = Consumption T = Taxes | = Investment G = Government Purchases (a) (b) Derive equations for the IS and LM Schedules. Money Sector Ms = 350 Md = (1/3)Y+200-10i What are the equilibrium levels of income and the interest rate? (c) (d) (e) (f) Use your answers in part (b) above to determine the equilibrium values of Consumption and Investment. Is the goods market in equilibrium? Explain. Suppose the government increases its expenditures by GH¢200 million. i. How much and in what direction will the IS curve shift? ii. iii. Write down the equations that describe the new IS curve. What are the new equilibrium interest rate r1* and the equilibrium level of income y1*? How would your answer in part (d) above change if the relevant investment function is i = 340-40i? Using your answers to parts (d) and (e) above, what do you make of the effectiveness of fiscal policy when the interest sensitivity of investment increased from 20 to 40? Explain.

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

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