# fiscal policy

Given the following equations:

C=500 +0.8(1-.025y)

I = 900-50r

G=800

T = 100

X = 350

M = 150+0.15y

M/P = 500

L = .25y-62.5r

Find

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.

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#### 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:

C=800+0.6y

I = 900-50r

G=800

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

y-0.45y=2300-50r

0.55y=2300-50r

solving for y we get:

y=4181.82-91r

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.