Sometimes understanding of ISLM becomes clearer when one works through the algebra. This question is designed to promote such understanding. Consider Country A, a closed economy characterized by the following relationships: C = 200 + 0.5YD I = 70- 5r G = T = 100 MD = 500 + Y – 15i where YD, disposable income, is equal to income less taxes, Y-T, and r and i are the real and nominal interest rates expressed in percent. Country A is ruled by a fierce dictator who abhors price movements, so assume prices are not allowed to change in this economy, i.e., that i = r. a) Assume that the Central Bank of Country A sets the nominal interest rate at 4% (r=4) and keeps it at that level. Find consumption, investment and output in equilibrium. b) What money supply is consistent with a real interest rate of 4 percent? Given this money supply, show that saving equals investment.
Sometimes understanding of ISLM becomes clearer when one works through the algebra. This question is designed to promote such understanding. Consider Country A, a closed economy characterized by the following relationships:
C = 200 + 0.5YD
I = 70- 5r
G = T = 100
MD = 500 + Y – 15i
where YD, disposable income, is equal to income less taxes, Y-T, and r and i are the real and nominal interest rates expressed in percent. Country A is ruled by a fierce dictator who abhors
a) Assume that the Central Bank of Country A sets the nominal interest rate at 4% (r=4) and keeps it at that level. Find consumption, investment and output in equilibrium.
b) What money supply is consistent with a real interest rate of 4 percent? Given this money supply, show that saving equals investment.
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