Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 13, Problem 4NP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Consider the economy of Ghana.The consumption function is given by C = 400 + 0.8(Y - T).The investment function is I = 600 - 70r.Government purchases is 400. Assume a balanced budget.The money demand function is (M/P)d = Y - 180r.The money supply M is 3,000 and the price level P is 3.a. Find the equilibrium interest rate r and the equilibrium level of income Y.b. Suppose that government purchases are increased from 400 to 600. What are the new equilibrium interest rate and level of income?c. Suppose instead that the money supply is increased from 3,000 to 3,500. What are the new equilibrium interest rate and level of income?d. With the initial values for monetary and fiscal policy, suppose that the price level rises from 3 to 5. What are the new equilibrium interest rate and level of income?
kindly answer only sub ques (c) and (d)..
Consider the economy of Ghana.The consumption function is given by C = 400 + 0.8(Y - T).The investment function is I = 600 - 70r.Government purchases is 400. Assume a balanced budget.The money demand function is (M/P)d = Y - 180r.The money supply M is 3,000 and the price level P is 3.a. Find the equilibrium interest rate r and the equilibrium level of income Y.b. Suppose that government purchases are increased from 400 to 600. What are the newequilibrium interest rate and level of income?c. Suppose instead that the money supply is increased from 3,000 to 3,500. What are the newequilibrium interest rate and level of income?d. With the initial values for monetary and fiscal policy, suppose that the price level rises from3 to 5. What are the new equilibrium interest rate and level of income?Question
A Keynesian economy is described by the following equations.
Consumption Cd = 250 + 0.5(Y - T) - 250r
Investment Id = 250 - 250r
Government purchases G = 300
Government taxes T = 300
Real money demand L = 0.5Y - 500r + πe
Money supply M = 3000
Full-employment output Y = 1250
Expected inflation πe = 0
(HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id)
Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
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