Question TWO An economy is described the following 2 equations: Y = C (Y – T) + I (r) + G .1 M/P = L(r, Y) %3D .2 a) If for this economy, the central bank increases money supply, explain what happens to: i. The interest rate ii. Income iii. Consumption iv. Investment b) If, for this economy, the government increases government purchases, explain what happens to: i. The interest rate ii. Income ii. Consumption iv. Investments

Question TWO An economy is described the following 2 equations: Y = C (Y – T) + I (r) + G .1 M/P = L(r, Y) %3D .2 a) If for this economy, the central bank increases money supply, explain what happens to: i. The interest rate ii. Income iii. Consumption iv. Investment b) If, for this economy, the government increases government purchases, explain what happens to: i. The interest rate ii. Income ii. Consumption iv. Investments

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 a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) 1 = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 M = 2000 P = 2 Where Cis planned consumption, / is planned investment spending, Tis government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. Department of Economics a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output.
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