Economics 2152A/B Lecture Notes - Economic Equilibrium, Money Supply

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cyanllama84

15 Nov 2012

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Equilibrium in money market, m/p = l(y,r + e) With all the variables determined in a b and c the asset market equilibrium condition determines the price level. To illustrate the role of price level, money demand. P = m/ l(y, r + e) ie. the price level is the ratio of the nomial money supply to real. M/m = rate of change in money supply - L(r + e)/ l(r + e) = rate of change in real money demand. P = 200 now: md/p = 5000 + 0. 2(1000) 1000(0. 10) = 5,100, m = md/200 = 1,020,000, v = y. p/md = 1000(200)/1,020,000 = 0. 196. Chapter 5 saving and investment in open economy. Capital account physical capital, financial capital (ka) Net foreign assets & the balance of payment accounts: Net foreign assets: are a country"s foreign assets minus its foreign liabilities (domestic assets which belong to foreigners) Net foreign assets may change in value due to:

Related Questions

What are the short-run equilibrium values of Y and r when P = 3?

Consumption: C = 310 + 0.6(Y - T) - 100r
Investment: I = 150 - 350r
Net Exports: NX = - 0.1Y - 50r + 0.1YFor + 1000rFor
Government purchases: G = 365
Taxes: T = 275
Foreign real income: Y For = 1200
Foreign real interest rate: rFor = 0.01
Nominal money supply: M = 4800
Real money demand: L = 1000 + 0.4Y - 400r

a.	Y = 1570 and r = 0.025

b.	Y = 1555 and r = 0.03

c.	Y = 1540 and r = 0.04

d.	Y = 1525 and r = 0.05

copperhare868

Assume production in an economy takes place according to Y = 200-L

and that labor is supplied according to L* = (W/P)^2 where W is the nominal wage and P is the price level meaning that W/P is the real wage.

There is no government in this economy and so G = T = 0. Consumption is given by: C = 600 + 0.5Y - 500r and investment by: I = 500 - 500r

Finally, money demand is even by Md P = Y - 2000r In this question we solve for equilibrium in period one. Assume that in this period the economy is in long-run equilibrium.

(a) Find the equilibrium real wage, level of employment, and output for this economy.

(b) Assume that the money supply is given by M = 1800 and find the equilibrium real interest rate, levels of consumption and investment, the equilibrium price level, and the nominal wage.

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2. Assume that householdsâ consumption function is given by C(Y â T) = 50 + 0.75(Y â T), that firmsâ investment function is I(r) = 150 â 10r, government spending is G = 150, and the tax bill T = 200.

(a) What is the Marginal Propensity to Consume (âMPCâ)?

(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 (âInvestment-Savingsâ). 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 â 50r.

(d) Solve for the equation of the LM Curve (âLiquidity-Moneyâ).

(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 (âADâ)

Economics 2152A/B Lecture Notes - Economic Equilibrium, Money Supply

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