Assume the following model of the economy: Y = C + I + G C = 120 + 0.5(Y - T) I = 100 - 10r G = 50 T = 40 Md = Y - 20 r Ms = 600 P = 2 Graph both the IS and the LM curves. Use r = 5, 10, 15 and Use the IS-LM model to predict the short-run effects of the shocks on income when: after the invention of a new high speed computer chip, many firms decide to upgrade their computer.

Assume the following model of the economy: Y = C + I + G C = 120 + 0.5(Y - T) I = 100 - 10r G = 50 T = 40 Md = Y - 20 r Ms = 600 P = 2 Graph both the IS and the LM curves. Use r = 5, 10, 15 and Use the IS-LM model to predict the short-run effects of the shocks on income when: after the invention of a new high speed computer chip, many firms decide to upgrade their computer.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.9P: Precautionary saving and prudence The Query to Example 17.2 asks how uncertainty about the future...

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Consider the following numerical example of the IS-LM model: C= 100 + 0.3Yd ; I = 150 + 0.2Y – 1000 i ; G = 200 ; T = 100. Derive the IS relation. I've got the answer written down as =400+0.5Y-500i can someone please provide solutions as to how it is this.
Consider the following numerical example of the IS-LM model. C = 300 + 0.5(Y – T) – 1000i | = 150 + 0.2Y – 3000i G = 400 T = 100 + .2Y i = .05 (M/P)d= 2Y – 8000i a.Derive the IS relation. (Hint: You want an equation with Y on the left hand side and everything else on the right.) b. Solve for Y, given that the central bank has set interest rate at 5%. (Use .05 in the equation.)
How would the following shocks affect the position of the IS curve in the (Y, i) coordinates? Will the curve shift left or right? The shocks are: A. The government reduces expenditure on national defense B. Consumers become pessimistic about their future earnings and start consuming less C. A country the US trades with experiences a recession D. The government sends stimulus checks to households E. The government introduces a new capital investment subsidy program
Assume the following model of the economy: Y = C + I + G C = 120 + 0.5(Y - T) I = 100 - 10r G = 50 T = 40 Md = Y - 20 r Ms = 600 P = 2 Graph both the IS and the LM curves. Use r = 5, 10, 15 and Use the IS-LM model to predict the short-run effects of each of the following shocks on income. A wave of credit card fraud increases the frequency by which people make transactions in cash. A best-seller novel titled “The Financial Diet” convinces the public to increase the percentage of their income devoted to savings.
Relating DSGE and AS/AD for a shock to government purchases: Consider thecomplete dynamic response of the economy to a temporary rise in governmentpurchases in the AS/AD framework.(a) Draw the AS/AD graph associated with this shock.
II. Consider the following IS-LM model:? = 200 + 0.25??? = 150 + 0.25? − 1,000?? = 250? = 200(?/?)? = 2? − 8,000??/? = 1,600a. Derive the IS relation. (Hint: You want an equation with ? on the left side and everythingelse on the right.)b. Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equationwith ? on the left side and everything else on the right.)c. Solve for equilibrium real output. (Hint: Substitute the expression for the interest rategiven by the LM equation into the IS equation and solve for output.)d. Solve for the equilibrium interest rate. (Hint: Substitute the value you obtained for ? inpart (c) into either the IS or LM equation and solve for ?.)e. Solve for the equilibrium values of ? and ? and verify the value you obtained for ? byadding ?, ?, and ?.f. Now suppose that the money supply increases to ?/? = 1,840. Solve for ?, ?, ?, and ?,and describe in words the effects of an expansionary monetary policy.g. Set ?/? equal to its initial…
Use the following versions of the IS-LM model to answer all sections: Question: a. Determine the IS function and its slope. b. Determine the LM function and its slope.
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.
Precautionary saving and prudence The Query to Example 17.2 asks how uncertainty about the future might affect a person's savings decisions. In this problem we explore this question more fully. All of our analysis is based on the simple two-period model in Example 17.1. a. To simplify matters, assume that r= in Equation 17.15. If consumption is certain, this implies that u(c0)=u(c1) or c0=c1. But suppose that consumption in period 1 will be subject to a zero-mean random shock, so that c1=c1p+x, where c1p is planned period- 1 consumption and x is a random variable with an expected value of 0. Describe why, in this context, utility maximization requires u(c0)=E[u(c1)] . b. Use Jensen's inequality (see Chapters 2 and 7 ) to show that this person will opt for c1pc0 , if and only if u is convex-that is, if and only if u0 . c. Kimball" suggests using the term "prudence" to describe a person whose utility function is characterized by u0 . Describe why the results from part (b) show that such a definition is consistent with everyday usage. d. In Example 17.2 we showed that real interest rates in the U.S. economy seem too low to reconcile actual consumption growth rates with evidence on individuals willingness to experience consumption fluctuations. If consumption growth rates were uncertain, would this explain or exacerbate the paradox?
An economy has: R = 10 +.ly, C= 14 + 9YD, G= 25, I = 75 -r, NX = 30 -.06y - .5p, MD = 25y-r, MS = 15 and ASo = 2p. A negative AS shock occurs: AS, = 2p – 60. a. Provide a diagram showing AS/AD to illustrate how real GDP and the price level are affected by this AS shock. A government can offset this AS shock by increasing the money supply OR increasing government spending. They won't do both. Calculate level of money supply MS= b. and the level of government spending G = that would be necessary to offset this AS shock.
Which of the following is a statement that you would AGREE with? Explain why. Use the AD-AS model. Assume the ceteris paribus assumption holds in all cases and that the economy is initially in short run macroeconomic equilibrium. 1. We observe a decrease in the price level and a decrease in real GDP. A possible explanation is an increase in expected future income or decrease in interest rates. 2. We observe a decrease in the price level and a decrease in real GDP. A possible explanation is an expansionary monetary policy or an increase in government spending. 3. We observe an increase in the price level and an increase in real GDP. A possible explanation an increase in expected future profit or an expansionary fiscal policy.
This question requires you to solve a macro model algebraically. Reading the appendix to this chapter will help you to answer this question. But, just in case, we lead you through it step by step. The equations for the model are as follows: i) C = c + MPC × YD consumption ii) I = I0 investment iii) G = G0 government purchases iv) T = tY net tax revenue v) X = X0 exports vi) IM = mY imports a. Step 1: Recall that Y D = Y – T. By using this fact, substitute the tax function into the consumption function and derive the relationship between desired consumption and national income. b. Step 2: Sum the four components of desired aggregate expenditure ( C, I, G, NX). This is the aggregate expenditure ( AE) function. Collect the autonomous terms separately from the induced terms. c. Step 3: Recall the equilibrium condition, Y = AE. Form the equation Y = AE, where AE is your expression for the AE function from part (b). (Your autonomous terms can be collectively labelled A and the terms that…