B06-Tutorial5-Solns

Principles of Macroeconomics (with Xtra!)

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Unformatted text preview: Page 1 of 5 THE UNIVERSITY OF TORONTO AT SCARBOROUGH Division of Management ECM B06H – Macroeconomic Theory and Policy: A Mathematical Approach TUTORIAL #5 - SOLUTIONS Q1. Suppose an economy is characterized by the following set of equations: C = 150 + 0.8(Y - T), I = 400 - 20r, G = 50, T = 50, A e = 0, M d = P(0.4Y - 20i), M s = 600, and P = 1. a) Derive and sketch the IS curve. Y = C + I + G (NII) Y = 150 + 0.8Y - 0.8(50) + 400 - 20r + 50 0.2Y = 560 - 20r Y = 2,800 - 100r IS Curve b) Derive and draw the LM curve. M d = M s 0.4Y - 20r = 600 (As i = r + A e = r here) 0.4Y = 600 + 20r Y = 1,500 + 50r LM Curve Page 2 of 5 c) What are the values of income and the rate(s) of interest in equilibrium? IS = LM 1,500 + 50r = 2,800 - 100r 150r = 1,300 r = ( 1,300/150 ) = 8.67 (percent) Y = 1,500 + 50(8.67) = 2,800 - 100(8.67) = 1,933.33 d) The Bank of Canada wishes equilibrium income to be 2500. What change in the money supply (if any) will be required? IS with Y = 2,500 yields: r = 3 (percent) LM written as a function of the money supply (M s ) is: Y = 2.5( M s ) + 50r LM with Y = 2,500 & r = 3 yields: M s = 940 Therefore the required change in the money supply is 340 (i.e. an increase in the M s of 340). e) What would be the change in government spending that would be required to attain a level of equilibrium income of 2500 if the money supply were maintained at 600?...
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B06-Tutorial5-Solns - Page 1 of 5 THE UNIVERSITY OF TORONTO...

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