IS-LM Curve Discussed
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The following equations describe an economy:
C = C + cYD, 0<c < 1, YD = Y-tY,
I = I - bi, b > 0
G = G
X = X
Q = mY 0<m<1
L = kY - hi, k,h >0
M/P = M/P
_
If C=100, c=0.8, t=0.25, I=700, b=50,
G=900, k=0.25, h=62.5, X=500, m=0.1
M/P = 500/1 .
1- Find the equation that describes the IS curve.
2- Calculate the simpler government spending multiplier in our open economy that applied under constant interest rate; ¥G;
3- If G increases by 50 billion dollars. What will happen to the position of IS curve?
4- Find the equation that describes the LM curve.
5- What are the equilibrium levels of output and interest rate?
6- Calculate the fiscal multiplier; à?; or the government spending multiplier after interest rate adjustment is taken into account.
" à?= ¥G / 1+k ¥G b/h"
7- If G increases by 50 billion dollars. What will be the effect on the equilibrium level of output that you got i(5)
8- Do you think a crowding out happened in this economy? Why?
9- Calculate the monetary policy multiplier; à?b/h
10- If your answer in (8) is yes. Explain Graphically or mathematically how the central Bank can accommodate this fiscal expansion.
Note: draw the suitable graph of each point.
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Solution Summary
The solution discusses 8 questions on IS curve, LM curve, equilibrium output, equilibrium interest rate, fiscal multiplier, government spending multiplier, crowding out, monetary policy multiplier and accommodation of fiscal expansion.
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The following equations describe an economy:
C = C + cYD, 0<c < 1, YD = Y-tY,
I = I - bi, b > 0
G = G
X = X
Q = mY 0<m<1
L = kY - hi, k,h >0
M/P = M/P
_
If C=100, c=0.8, t=0.25, I=700, b=50,
G=900, k=0.25, h=62.5, X=500, m=0.1
M/P = 500/1 .
c= 0.8
t= 0.25
b= 50
h= 62.5
m= 0.1
I= 700
G= 900
X= 500
C= 100
C=C+cYD=C+cY(1-t)=100+0.8Y(1-0.75)=100+0.6Y
I=I-bi=700-50i
Q=0.1Y
1- Find the equation that describes the IS curve.
Y=C+I+G+X-Q
Y=(100+0.6Y) + (700-50 i) + (900) + (500)- (0.1Y)
or Y= (0.6-0.1)Y + (100+700+900 + 500 ) - 50 i
or Y(1-0.5) = 2200 - 50 i
or Y= 1/0.5 * (2200-50 i)
Or Y=2*(2200-50i)=4400-100 i
Y=4400-100 i IS curve
2- Calculate the simpler government spending multiplier in our open economy that applied under constant ...
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