301HWK4 - Economics 301A Autumn 2015 Name ASSIGNMENT#4 Due...

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Economics 301A Name:____________________ Autumn 2015 ASSIGNMENT #4 Due Monday November 9 (at the beginning of the class) 1. Fiscal policy – impact of an increase in government spending in the short and the medium run Use the following IS-LM model to calculate the effect on various aggregates of an increase in government spending. The following equations describe the economy of Islandia Consumption C = 500 + 0.8(Y-T) Investment I = 500 + 0.1Y – 500i Government purchases G = 100 Taxes T = 125 Real Money Demand L = 0.5Y - 250i Nominal Money Supply M = 9560 Price Level P = 2 Y is output and i is the interest rate The economy is at its medium run equilibrium level (i.e. full employment). Original equilibrium of the economy a. Derive the equation for the IS curve as Y = IS Y = b. Derive the equation for the LM curve as i = LM i =
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Economics 301A 2 c. Calculate equilibrium output (the natural rate of output) and equilibrium interest rate. Y n = i = % d. Calculate the corresponding level of consumption and of investment C = I = Increase in government spending in the short run Congress increases government spending by 100 and as a result the price level changes 1 by 1%. a. Derive the equation for the IS curve IS Y = b. Derive the equation for the LM curve (taking into account the change in the price level).
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