An economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, the new expenditure is 51.567 Now we're adding an LM curve to the economy from above. The money market is given by M/P = 0.02 / (r - Y/10,300)^2 M = 22 P = 2 1. We continue with the fiscal expansion scenario, with G0=10 and G1=12. Draw a new graph that includes the LM curve and both the IS curves. Show how at the same old unchanged r = 0.047 the volume of transactions supported by the money market is lower than the expenditure afforded by the goods and financial markets. That is, map r=0.047 into the expenditure, Y1, and into the original volume of transactions, Y0. 2. Now let's let the three markets interact and choose the interest rate at which the expenditure equals the volume of transactions. Solve the IS and LM simultaneously to find that r.
An economy's IS curve represents the following markets.
Goods:
slc = 4
MPC = 0.7
G = 10
T = 9
Finance:
I = 10 - 90r
and r = 0.047
Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12.
The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, the new expenditure is 51.567
Now we're adding an LM curve to the economy from above.
The
M/P = 0.02 / (r - Y/10,300)^2
M = 22
P = 2
1. We continue with the fiscal expansion scenario, with G0=10 and G1=12. Draw a new graph that includes the LM curve and both the IS curves. Show how at the same old unchanged r = 0.047 the volume of transactions supported by the money market is lower than the expenditure afforded by the goods and financial markets. That is, map r=0.047 into the expenditure, Y1, and into the original volume of transactions, Y0.
2. Now let's let the three markets interact and choose the interest rate at which the expenditure equals the volume of transactions. Solve the IS and LM simultaneously to find that r.
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