chapter9 - Chapter 9 Numerical Problems 1. a. Sd = Y- Cd- G...

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Chapter 9 Numerical Problems 1. a. S d = Y- C d - G = Y - (4000 - 4000r + 0.2Y) - 2000 = -6000 + 4000r + 0.8Y b. (1) Using the equation that goods supplied equals goods demanded gives Y = C d + I d + G = (4000 - 4000r + 0.2Y) + (2400 - 4000r) + 2000= 8400 - 8000r + 0.2Y. So 0.8Y = 8400 - 8000r, or 8000r = 8400 - 0.8Y. (2) Using the equivalent equation that desired saving equals desired investment gives S d = I d -6000 + 4000 r + 0.8 Y = 2400 - 4000 r 0.8 Y = 8400 - 8000 r , or 8000 r = 8400 - 0.8 Y . So we can use either equilibrium condition to get the same result. When Y = 10,000, 8000 r = 8400 - (0.8 x 10,000) = 400, so r = 0.05. When Y = 10,200, 8000 r = 8400 - (0.8 x 10,200) = 240, so r = .03. c. When G = 2400, desired saving becomes S d = -6400 + 4000 r + 0.8 Y . S d is now 400 less for any given r and Y , this shows up as a shift in the S d line from S1 to S2 in Fig. 10. 19. Setting S d = I d , we get -6400 + 4000 r + 0.8 Y = 2400 - 4000 r 8000 r = 8800 - 0.8 Y . Similarly, using the equation that goods supplied equals goods demanded gives: Y = C d + I d + G = (4000 - 4000 r + 0.2 Y ) + (2400 - 4000 r ) + 2400 = 8800 - 8000 r + 0.2 Y . So 0.8 Y = 8800 - 8000 r , or 8000 r = 8800 - 0.8 Y . At Y = 10,000, this is 8000 r = 8800 - (0.8 x 10,000) = 800, so r = 0.10. The market-clearing real interest rate increases from 0.05 to 0.10. Thus the IS curve shifts up 2.
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a. M d / P = 3000 + 0.1 Y - 10,000 i = 3000 + 0.1 Y - 10,000( r + ð e ) = 3000 + 0.1 Y - 10,000( r + .02) = 2800 + 0.1 Y - 10,000 r . Setting M / P = M d / P : 6000/2 = 2800 + 0.1 Y - 10,000 r 10,000 r = -200 + 0.1 Y r = -0.02 + ( Y / 100,000). When Y = 8000, r = 0.06. When Y = 9000, r = 0.07. These points are plotted as line LM a in Fig. 9.20. b. M = 6600, so M / P = 3300. Setting money supply equal to money demand: 3300 = 2800 + 0.1 Y - 10,000 r 10,000 r = -500 + 0.1 Y r = -0.05 + ( Y / 100,000). When Y = 8000, r = 0.03. When Y = 9000, r = 0.04. The LM curve is shifted down from LM a to LM b in Fig. 9.20, since the same level of Y gives a lower r at equilibrium. c. M d / P = 3000 + 0.1 Y - 10,000( r + ð e ) = 3000 + 0.1 Y - 10,000 r - (10,000 x .03) = 2700 + 0.1 Y - 10,000 r . Setting money supply equal to money demand: 3000 = 2700 + 0.1 Y - 10,000 r 10,000 r = -300 + 0.1 Y r = -0.03 + ( Y / 100,000). When Y = 8000, r = 0.05. When Y = 9000, r = 0.06. The LM curve is shifted down from LM a to LM c in Fig. 9.20, since there is a higher real interest rate for every given level of output. The LM curve shifts down by one percentage point (the increase in ð e ) because for any given Y, the same nominal interest rate clears the asset market. With an unchanged nominal interest rate, the increase in ð e is matched by an equal decrease in r. 3.
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chapter9 - Chapter 9 Numerical Problems 1. a. Sd = Y- Cd- G...

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