tutorial 4 - ECON205 Macroeconomic Theory and Policy...

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ECON205, Macroeconomic Theory and Policy - Tutorial 4: Short Run Macroeconomics (III) Simone Marsiglio 1 Conceptual Questions 1. Consider the IS-LM model and represent graphically the equilibrium, discussing the effects of expan- sionary fiscal policy on equilibrium output and equilibrium interest rate. 2. Consider the IS-LM model and represent graphically the equilibrium, discussing the effects of expan- sionary monetary policy on equilibrium output and equilibrium interest rate. 3. Consider the IS-LM model, represent graphically the equilibrium, and show the effects on output and the interest rate of a fiscal contraction. Can you tell what happens to investment? Why? 2 Technical Problems 1. Consider first the goods market model with constant investment: C = c 0 + c 1 ( Y - T ) and I = I with G and T given. a. Solve for the equilibrium output. What is the value of the multiplier? Now let investment depend on both sales and the interest rate: I = b 0 + b 1 Y - b 2 i .
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