Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Chapter 5, Problem 5QAP
a.
To determine
To derive:IS relation.
b.
To determine
To explain:The effect of interest rate fixed by central bank on the equation derived in sub part (a).
c.
To determine
To calculate: Level of real money supply when interest rate is 5%.
d.
To determine
To calculate:Verify the value of Y obtained by adding C, I and G.
e.
To determine
To calculate: New equilibrium value of M/P supply.
f.
To determine
To explain: The effect of the expansionary fiscal policy on the real money supply.
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Consider the following numerical example of the IS-LM model:
C = 200 + 0.25YD
I = 150 + 0.25Y - 1000iG = 250
T = 200
i = .05
a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.)
b. The central bank sets an interest rate of 5%. How is that decision represented in the equations?
c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i
d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G.
e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply?
f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary…
Consider a consumption function of C = 0.75 (Y – T).
a) If government spending increases by $300 and there is a tax hike of $500 to fund this increase, according to the IS-LM model will the IS curve shift up or down and by how much?b) Considering your shift in the IS curve from part a, how should the Federal Reserve adjust the money supply if they want to keep interest rates constant?
In the monetary intertemporal model, assume that money supply is always fixed. Suppose that there is an increase in real wage. How does this change affect interest rates (both real and nominal), price level, employment, total factor productivity and equilibrium output? Carefully explain your answers.
b) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the Central Bank conducts an open market purchase of government debt, what is the effect on price level? Use an appropriate set of diagram to explain your answer.
Chapter 5 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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