Section B Answer the question. Provide the detailed derivation for each answer. Consider the IS-LM model, and suppose that the economy of Mermaid Land can be characterised by the following relations (all units are in millions of domestic currency): C = 200+ 0.25(YT) I = 150+ 0.25Y - 1000i G = 250 T = 200 = 2Y - 8000i = 1600 (a) Derive the equation for the IS curve (b) Derive the equation for the LM curve (c) Solve for equilibrium output (d) Determine the equilibrium interest rate (e) Determine equilibrium levels of consumption and investment (f) Check whether C + G + 1 = Y (g) Following up on question (e), suppose further that the central bank tries to increase the equilibrium real output by increasing the money supply, such that SI M = 1840 Solve for the equilibrium real output and interest rate. (h) Do you think the central bank intervention is effective in increasing the equilibrium real output? Explain your answer briefly.
Section B Answer the question. Provide the detailed derivation for each answer. Consider the IS-LM model, and suppose that the economy of Mermaid Land can be characterised by the following relations (all units are in millions of domestic currency): C = 200+ 0.25(YT) I = 150+ 0.25Y - 1000i G = 250 T = 200 = 2Y - 8000i = 1600 (a) Derive the equation for the IS curve (b) Derive the equation for the LM curve (c) Solve for equilibrium output (d) Determine the equilibrium interest rate (e) Determine equilibrium levels of consumption and investment (f) Check whether C + G + 1 = Y (g) Following up on question (e), suppose further that the central bank tries to increase the equilibrium real output by increasing the money supply, such that SI M = 1840 Solve for the equilibrium real output and interest rate. (h) Do you think the central bank intervention is effective in increasing the equilibrium real output? Explain your answer briefly.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter4: Estimating Demand
Section: Chapter Questions
Problem 1.4CE
Related questions
Question
Part G H
![Section B
Answer the question. Provide the detailed derivation for each answer.
Consider the IS-LM model, and suppose that the economy of Mermaid Land can be
characterised by the following relations (all units are in millions of domestic
currency):
C = 200+ 0.25(Y-T)
I = 150+ 0.25Y - 1000i
d
G = 250
T = 200
= 2Y 8000i
S
= 1600
(a) Derive the equation for the IS curve
(b) Derive the equation for the LM curve
(c) Solve for equilibrium output
(d) Determine the equilibrium interest rate
(e) Determine equilibrium levels of consumption and investment
(f) Check whether C + G + I=Y
(g) Following up on question (e), suppose further that the central bank tries to
increase the equilibrium real output by increasing the money supply, such that
SI
= 1840
Solve for the equilibrium real output and interest rate.
(h) Do you think the central bank intervention is effective in increasing the
equilibrium real output? Explain your answer briefly.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd60e0c0f-100d-4a55-920f-5121017cb354%2F09c3d78a-c701-4e6b-9b0f-d36c7f03684f%2F79otlgi_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Section B
Answer the question. Provide the detailed derivation for each answer.
Consider the IS-LM model, and suppose that the economy of Mermaid Land can be
characterised by the following relations (all units are in millions of domestic
currency):
C = 200+ 0.25(Y-T)
I = 150+ 0.25Y - 1000i
d
G = 250
T = 200
= 2Y 8000i
S
= 1600
(a) Derive the equation for the IS curve
(b) Derive the equation for the LM curve
(c) Solve for equilibrium output
(d) Determine the equilibrium interest rate
(e) Determine equilibrium levels of consumption and investment
(f) Check whether C + G + I=Y
(g) Following up on question (e), suppose further that the central bank tries to
increase the equilibrium real output by increasing the money supply, such that
SI
= 1840
Solve for the equilibrium real output and interest rate.
(h) Do you think the central bank intervention is effective in increasing the
equilibrium real output? Explain your answer briefly.
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Step 1: In order to answer part g and h, we initially have to solve for equilibrium output.
VIEWStep 2: Equation the equation of IS and LM curve to get equilibrium.
VIEWStep 3: Solving part G by putting new money supply equation and get new LM curve to get the equilibrium.
VIEWStep 4: Reasons for increase in output due to increase in money supply by central bank.
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