The following equations represent the behavior of a given economy.
C = 100 + 0.6YD
I = 100+0.2Yâ400i
G = 300
T = 400
(M/P)s= 160
(M/P)d = 0.4Y â 2,400i
C is consumption; YD is disposable income; I is investment; G is government expenditure; T represents taxes; (M/P)s is money supply; (M/P)d is money demand; and i is the interest rate.
A) Write an expression for goods market equilibrium (the IS relationship).
B) Write an expression for financial market equilibrium (the LM relationship).
C) What are the levels of income and interest rate that bring the goods and financial market into equilibrium? What is the level of investment in the equilibrium?
D) In this example, the government is initially running a surplus. What happens if G increases to the point when the government has a balanced budget? Does C increase, decrease or stay constant? Does I increase, decrease or stay constant? Does i increase, decrease or stay constant?
The following equations represent the behavior of a given economy.
C = 100 + 0.6YD
I = 100+0.2Yâ400i
G = 300
T = 400
(M/P)s= 160
(M/P)d = 0.4Y â 2,400i
C is consumption; YD is disposable income; I is investment; G is government expenditure; T represents taxes; (M/P)s is money supply; (M/P)d is money demand; and i is the interest rate.
A) Write an expression for goods market equilibrium (the IS relationship).
B) Write an expression for financial market equilibrium (the LM relationship).
C) What are the levels of income and interest rate that bring the goods and financial market into equilibrium? What is the level of investment in the equilibrium?
D) In this example, the government is initially running a surplus. What happens if G increases to the point when the government has a balanced budget? Does C increase, decrease or stay constant? Does I increase, decrease or stay constant? Does i increase, decrease or stay constant?
