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1. Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P equals 800.

a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.)

b. What is the slope of the LM curve?

c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?

d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?

e. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?

 

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Retselisitsoe Pokothoane
Retselisitsoe PokothoaneLv10
28 Sep 2019

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Related questions

Assume that an economy is characterized by the following equations: C = 100 + (2/3)(Y - T), T = 600, G = 500, I = 800 - (50/3)r, Ms/P = Md/P = 0.5Y - 50r

a. Write the numerical IS curve for the economy, expressing Y as a numerical function of G, T, and r.

b. Write the numerical LM curve for this economy, expressing r as a function of Y and M/P.

c. (i) Solve for the equilibrium values of Y and r, assuming P = 2.0 and M = 1,200.

   (ii) How do they change when P = 1.0? Check by computing C, I, and G.

d. Write the numerical aggregate demand curve for this economy, expressing Y as a function of G, T, and M/P.

Consider an economy described by the following equations: C = 200 + 0.75(Y-T) where I = 200 - 25r, G = 100, T = 100, L(r, Y) = Y - 100r M = 1000 P = 2

(a) Derive the equation for the IS curve

(b) Derive the equation for the LM curve.

(c) What are the equilibrium interest rate r and the equilibrium level of output Y?

(d) What is the government purchases multiplier?

(e) What is the tax multiplier?

(f) Suppose that government purchases are raised from 100 to 150. How does the IS curve shift? What are the new equilibrium interest rate and level of output?

(g) Suppose instead that the money supply is raised from 1,000 to 1,200. How does the LM curve shift? What are the new equilibrium interest rate and level of output?

(h) With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rate and level of output?

Assume the following model of the economy, with the price level fixed at 1.0:

C = 0.8(Y-T), Ms = 1200, Md/P = 0.4Y-40r,

I = 800-20r, T = 1000, G = 1000,

where Ms and Md are the nominal supply of money and nominal demand for money.

(a) Write a formula for the IS curve, showing Y as a function of r alone.

(b) Write a formula for the LM curve, showing Y as a function of r alone.

(c) What are the short-run equilibrium values Y, r, Yd, C, I, S, Sp, and Sg, and national saving?

(d) Assume G increases by 200. By how much will Y increase in short-run equilibrium? What is the government purchases multiplier?

(e) Assume that G is back at its original level, but Ms increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for the money supply?

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