Fantasyland be characterised by the following relations (all units are in millions of domestic currency). Solve the numerical exercises. If necessary, round up to second decimal digit. Provide the detailed derivation for each answer and a textual description. When required to graph the model, you can - for instance - draw it by hand or using PowerPoint. C = 200 +0.25 YD I = 150+ 0.25Y - 1200i T = 150 G = 250 M/P=2Y - 6000i a. Derive the IS relation and draw it on a diagram with corresponding labels b. The central bank sets the policy rate at 5%. What is the level of real money supply when the interest rate is 5%? Draw the LM curve: is it horizontal or upward-sloping? c. Find the equilibrium level of Consumption and Investment, and verify the value you obtained for the GDP by summing up its components.
Fantasyland be characterised by the following relations (all units are in millions of domestic currency). Solve the numerical exercises. If necessary, round up to second decimal digit. Provide the detailed derivation for each answer and a textual description. When required to graph the model, you can - for instance - draw it by hand or using PowerPoint. C = 200 +0.25 YD I = 150+ 0.25Y - 1200i T = 150 G = 250 M/P=2Y - 6000i a. Derive the IS relation and draw it on a diagram with corresponding labels b. The central bank sets the policy rate at 5%. What is the level of real money supply when the interest rate is 5%? Draw the LM curve: is it horizontal or upward-sloping? c. Find the equilibrium level of Consumption and Investment, and verify the value you obtained for the GDP by summing up its components.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider the IS-LM model and suppose that the economy of Fantasyland can
be characterised by the following relations (all units are in millions of domestic
currency).
Solve the numerical exercises. If necessary, round up to second decimal digit.
Provide the detailed derivation for each answer and a textual description.
When required to graph the model, you can - for instance - draw it by hand or
using PowerPoint.
C = 200+ 0.25 YD
I = 150+ 0.25Y - 1200i
T = 150
G = 250
M/P = 2Y - 6000i
a. Derive the IS relation and draw it on a diagram with corresponding
labels
b. The central bank sets the policy rate at 5%. What is the level of real
money supply when the interest rate is 5%? Draw the LM curve: is it
horizontal or upward-sloping?
c. Find the equilibrium level of Consumption and Investment, and verify
the value you obtained for the GDP by summing up its components.
d. Now, suppose that the central bank cuts the interest rate to 3%. Has the
money supply changed? Calculate and describe this policy action's
effect on Y, I, and C. Graph the new relations and equilibrium values.
e. Return to the original interest rate and imagine the government rises
spending to 400. Describe the effect of this policy on Y, I, C, and the
real money supply. Graph the new conditions and equilibrium values.
Transcribed Image Text:f. Now keep the increase in government spending, G = 400, and assume
real money supply is fixed as in point (b). Compare the effect of the
fiscal stimulus here and at point (e)
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