tutorial2

# tutorial2 - Tutorial 2 Week 4 1 Consider the following...

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Tutorial 2, Week 4 1. Consider the following IS-LM model: C = 200 + .25Y D I = 150 + .25Y - 1000i G = 250 T = 200 (M/P) d = 2Y - 8,000i i = i 0 = 0.05 a. Derive the IS relation. (Hint: You want an equation with Y on the left side, all else on the right.) b. Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equation with i on the left side, all else on the right.) c. Solve for equilibrium real output. (Hint: Substitute the value for the interest rate into the IS equation and solve for output.) d. Solve for the equilibrium real money supply. (Hint: Substitute the value you obtained for Y in [c] into the LM equation and solve for M/P. ) e. Solve for the equilibrium values of C and I and verify the value you obtained for Y by adding up C, I, and G. f. Now suppose that the interest rate, i 0 was cut to 3% (i.e. 0.03). Solve for Y, M/P, C, and I, and describe in words the effects of an expansionary monetary policy. g. Set the interest rate back to 5%. Now suppose that government spending increases to G = 400. If the central bank keeps the interest rate unchanged, find the effects of this fiscal
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