Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 10, Problem 5AP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model
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Students have asked these similar questions
a) Which of the following would a classical macroeconomist disagree with?
The interest rate is the price of time or productivity of capital
Nominals effect nominals
Recessions are caused by an over production of all economic goods
Prices should be as flexible as possible
Effective demand comes from prior supply
b) Which of the following is true?
The expected costs and returns for holding money are important for estimating the demand of real cash balances
The difference between nominal GNP and real GNP is that nominal GNP has been adjusted by a price deflator to account for changes in the value of money (inflation)
People in Group 1 receive the inflation tax on their cash-balances
Interest is the price of money
The real money supply is equal to the nominal money supply divided by the real money supply
Question Four Assume the following IS-LM model: Expenditure Sector AD = C + I + GC = 130+ (4/5) YD YD = Y-TT = 100+1/4Y1 = 300-20i G = 150 Where, Ms = Real Money Supply Md Real Money Demand C = Consumption T = Taxes | = Investment G = Government Purchases (a) (b) Derive equations for the IS and LM Schedules. Money Sector Ms = 350 Md = (1/3)Y+200-10i What are the equilibrium levels of income and the interest rate? (c) (d) (e) (f) Use your answers in part (b) above to determine the equilibrium values of Consumption and Investment. Is the goods market in equilibrium? Explain. Suppose the government increases its expenditures by GH¢200 million. i. How much and in what direction will the IS curve shift? ii. iii. Write down the equations that describe the new IS curve. What are the new equilibrium interest rate r1* and the equilibrium level of income y1*? How would your answer in part (d) above change if the relevant investment function is i = 340-40i? Using your answers to parts (d) and (e)…
Consider an economy in which the LM and IS functions are given below. Suppose the economy is purely classical so that yt=ý (you can see in picture)
Then these equations can be condensed to
LM mt - pt = y + c2Rt + εt, c2 < 0
IS Rt = r + Et(pt+1 - pt) + nt
For simplicity, delete εt. Then assume that the monatery authority creates money according to
MP mt = u0 + u1t + et
Assume that et and nt are white noise and find the solution for pt and then for Rt.
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