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    IS-LM setup

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    Assignment:

    1) Assume last year's real GDP was $7,000 billion, this year's nominal GDP is $8,820 billion, and the GDP-deflator for this year is 120. What was the growth rate of real GDP?

    2) Calculate the values for government purchases (G), private domestic saving (S), and private domestic investment (I) from the following information (all variables are in billions of dollars).
    national income Y = 5,200 budget deficit BuD = 150
    disposable income YD = 4,400 trade deficit TD = 110
    consumption C = 4,100

    3) "Under a fixed exchange rate system, expansionary monetary policy depletes foreign reserves at the central bank." Comment on this statement with the help of an IS-LM diagram.

    Instructions for assignment:

    Please highlight the final answers for questions 1 and 2.

    In question 2, clearly identify the answers for G, S and I

    Please follow the prescribed directions for Question 3

    © BrainMass Inc. brainmass.com May 20, 2020, 6:15 pm ad1c9bdddf
    https://brainmass.com/economics/exchange-rates/is-lm-setup-268237

    Solution Preview

    1. Real GDP last year = $7000 billion
    Nominal GDP this year = $8820 billion
    GDP Deflator = 120

    By definition,
    GDP Deflator = (Nominal GDP / Real GDP) * 100

    Therefore we have,
    120 = (8820 / Real GDP) * 100
    or Real GDP = (8820 * 100)/120
    or Real GDP = 7350

    Hence, Real GDP this year is $7350 billion.

    By definition

    GDP Growth = (Change in GDP / Last Year GDP) * 100

    Putting in the numbers

    GDP Growth = ((7350 - 7000)/7000)*100
    or GDP Growth = (350/7000)*100
    or GDP Growth = ...

    Solution Summary

    IS-LM setup is assessed.

    $2.19

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