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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 Preview

Please see the attached file.

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 ...

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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