Question One Assume the equations for the IS curve and LM curves for an economy are: Y= 1,600 – 50r r=Y/50 - 12. (a) Derive and interpret the slopes of the IS and LM curves above. Is the IS curve flatter than the LM curve? Explain. (b) Find the equilibrium levels of income (Y*) and the interest rate (r*). (c) How would your answers in part (b) above change if the government increases its expenditure by 700 unit which is financed by an increase in lump sum taxes of 500 units and an increase in the money supply of 200 units? Assume the following functions: C= 700+0.8Yd I-200-25r T-120+0.25Y L-2Y-50r With the help of an IS-LM diagram explain why income and interest rate changed in part (c) above. Assume the investment function changes from I-200-25r to I-200-50r. Will monetary policy be more effective on the new investment function? Use IS-LM diagrams to support (d) (e) your answer.

Question One Assume the equations for the IS curve and LM curves for an economy are: Y= 1,600 – 50r r=Y/50 - 12. (a) Derive and interpret the slopes of the IS and LM curves above. Is the IS curve flatter than the LM curve? Explain. (b) Find the equilibrium levels of income (Y) and the interest rate (r). (c) How would your answers in part (b) above change if the government increases its expenditure by 700 unit which is financed by an increase in lump sum taxes of 500 units and an increase in the money supply of 200 units? Assume the following functions: C= 700+0.8Yd I-200-25r T-120+0.25Y L-2Y-50r With the help of an IS-LM diagram explain why income and interest rate changed in part (c) above. Assume the investment function changes from I-200-25r to I-200-50r. Will monetary policy be more effective on the new investment function? Use IS-LM diagrams to support (d) (e) your answer.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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