An economy is initially described by the following equations: Y= C+I+ G C= 50 +0.8(Y – T). I= 125 - 10r (M/P)=Y-40r G = 150 T = 100 M = 2,000 P = 5 Derive the functions of the IS curve and the LM curve. Calculate a. the equilibrium interest rate and income. b. Suppose a newly elected president cuts taxes by 20%. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? Now assume that the central bank adjusts the money supply to C. hold the interest rate constant? What is the new equilibrium income? What must the new money supply be?

An economy is initially described by the following equations: Y= C+I+ G C= 50 +0.8(Y – T). I= 125 - 10r (M/P)=Y-40r G = 150 T = 100 M = 2,000 P = 5 Derive the functions of the IS curve and the LM curve. Calculate a. the equilibrium interest rate and income. b. Suppose a newly elected president cuts taxes by 20%. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? Now assume that the central bank adjusts the money supply to C. hold the interest rate constant? What is the new equilibrium income? What must the new money supply be?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?

Section9.A: The Simple Algebra Of Income Determination And The Multiplier

Problem 4TY

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