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fiscal policy

Given the following equations:
C=500 +0.8(1-.025y)
I = 900-50r
T = 100
X = 350
M = 150+0.15y

M/P = 500
L = .25y-62.5r


a)AE equation
b) IS curve
c) LM curve
d) equilibirum Y
d) trade balance
e)gov't budget
f) what happens if g rises to 900?
g)what is there is an increase in the supply of money?

Please note answers include full step by step instructions, with easy to understand analysis.

Solution Preview

first solve for AE.

We need to know which constants are subtracted from the equation:
= taxes become negative, and so does imports

The system of equations now becomes:
I = 900-50r
T = - 100
X = 350
M = -150-0.15y (make sure to subtract both parts of the equation)

So all you do is add all the constants and you get:
AE=2300 +0.45y -050r

Now from here we can get the IS curve:

we set AE= Y
Y = 2300 +0.45y -050r

group all common terms together
solving for y we get:

What does this mean? IS is the equilibrium equation for the goods market. Every time r increase by 1%, y should increase by 91 units.

Now how go we get the LM curve?

We take the demand for money and ...

Solution Summary

Calculate equilibrium Y in this case.