Assume an economy were characterized by the following equationsC = C + bYDI=Ī - diG=GT=TX=XIM= Z +fYMD= a + Bi+yYMS=ⒸP = 1(1)(2)(3)(4)(5)(6)(7)(8)(9)where the notation denoting parameters C,b,1,d,e,G,T,X,Z,f,a, ß,y, are all positive andYD denotes disposable income. We assume that 0

IS curves denote the market equilibrium for goods and services, whereas the LM curve denotes the…

Assume an economy were characterized by the following equations C = C + bYD I= Ï - di G=G T= T X=X IM= Z + fY MD= a + Bi + yY MS= P = 1 (1) (2) (3) (4) (7) (8) (9) where the notation denoting parameters YD denotes disposable income. We assume that 0

Assume an economy were characterized by the following equations C = C + bYD I= Ï - di G=G T= T X=X IM= Z + fY MD= a + Bi + yY MS= P = 1 (1) (2) (3) (4) (7) (8) (9) where the notation denoting parameters YD denotes disposable income. We assume that 0

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

Assume an economy were characterized by the following equations
C = C + bYD
I=Ī - di
G=G
T=T
X=X
IM= Z +fY
MD= a + Bi+yY
MS=Ⓒ
P = 1
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
where the notation denoting parameters C,b,1,d,e,G,T,X,Z,f,a, ß,y, are all positive and
YD denotes disposable income. We assume that 0 <b+e<1 and f<b.
(a) Find the equations of the IS and LM curves.
(b) If government spending increases by 1, how much does the IS curve shift?
What is the intuition?
(c) Find the short-run equilibrium output level and interest rate.
(d) If government spending increases by 1, how much does the Ye increases? Compare this
to the one in (b).

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Step 1: Define IS-LM curves

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Step 2: Find equations of IS-LM curve

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Step 3: Calculate shift in IS curve

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Step 4: Find the short-run equilibrium output level and interest rate

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Step 5: Compare increase in equilibrium output to the one in part (b)

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