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MGEA06H3 Lecture Notes - Maryland Route 30, Money Market, Disposable And Discretionary Income

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bluetiger347
16 Jun 2013
School
UTSC
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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Document Summary

This is called the is curve & you will learn it in ecmb06: note: since we have two unknowns (y & r), we cannot just solve for y* and r* by setting. We need one more equation that shows the relationship between y & r, and this can be obtained from the money market equilibrium. This is called the lm curve & you will learn it in ecmb06. Di = y 0. 3y + [20 0. 075y] = 20 + 0. 625y. Part (a: disposable income, di, c = c(y): C = 16 + 0. 5y: the ae function: Ae = [16 + 0. 5y] + [20 50r] + 49. Ae = 85 + 0. 5y 50r: setting y = ae: Y = 170 100r: money market equilibrium: Sub r = 0. 1 into is or lm: Lm: y* = 120 + 400(0. 1) = 160. Suppose g increases by 10, i. e. , g = 59: the new ae function:

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Related Questions

2. Assume that households’ consumption function is given by C(Y − T) = 50 + 0.75(Y − T), that firms’ investment function is I(r) = 150 − 10r, government spending is G = 150, and the tax bill T = 200.

(a) What is the Marginal Propensity to Consume (“MPC”)?

(b) What is the equilibrium level of real GDP, in the goods market, if the real interest rate is 5%? (Plug in r = 5 for 5%, rather than 0.05 This is an assumption about the way we scale the coefficients in the investment function.)

(c) Solve for the equation of the IS Curve (“Investment-Savings”). How will this equation change if government spending increases to 200? The money supply is MS = 3000 and the price level is P = 4. Money/liquidity demand is given by Md/P = L(r, Y ) = Y − 50r.

(d) Solve for the equation of the LM Curve (“Liquidity-Money”).

(e) Based on your answers to the previous two questions, what are the equilibrium levels of the real interest rate and real GDP? (G is back to 150.)

(f) Assume now that P is unknown. Solve for the equation of the Aggregate Demand curve (“AD”)