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**Unformatted text preview: **THE UNIVERSITY OF TORONTO AT SCARBOROUGH Division of Management ECM B06H Macroeconomic Theory and Policy: A Mathematical Approach TUTORIAL #5 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, Ae = 0,
Md = P(0.4Y - 20i), Ms = 600, and P = 1.
a) b) c) d) Derive and sketch the IS curve. Derive and draw the LM curve. What are the values of income and the rate(s) of interest in equilibrium? The Bank of Canada wishes equilibrium income to be 2500. What change in the money supply (if any) will be required? 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? Discuss the effects on the interest rate(s) of policies d) and e). Derive the aggregate demand curve. e) f) g) h) Q2. Can you determine what the effect is of a 1% increase in the price level? What is the effect of an increase of expected inflation from 0 to 0.01? Discuss your answers. (Hint: Think of what would occur in an AD/AS diagram). Suppose an economy is characterized by the following set of equations: Page 1 of 2 C = 100 + 0.667(Y - T), I = 800 - 16.67r, G = 500, T = 600, Ae = 0,
Md = P(0.5Y - 50i), Ms = 1200, and P = 2.
a) b) Derive the IS, the LM, and the aggregate demand curves. What is the effect on output and the real interest rate if the money supply is decreased to 800? What is the effect on the aggregate demand curve if government spending is increased to 560? c) Page 2 of 2 ...

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