E304SP07Hw9Ans

# E304SP07Hw9Ans - The Pennsylvania State University...

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Spring Semester, 2007 Department of Economics Clifford Economics 304 Homework #9 – Answer Sheet 1. Your textbook (Abel and Bernanke, Macroeocnomics , Fifth Edition) Numerical Problem #3, page 388. (a.) IS Curve: S d = Y – (250 + .5(Y – 200) – 500r) – 200 = .5Y – 350 + 500r. Set S d = I d and solve for r: .5Y – 350 + 500r = 250 – 500r Or r = (600 - .5Y)/1000 LM Curve : M/P = .5Y – 500(r + 0) so r = (.5Y – M/P)/ 500 = (.5Y – 7650/P)/ 500 AD Curve : Simultaneously solve LM and IS to get rid of r. (600 - .5Y)/1000 = (.5Y – 7650/P)/ 500 So 600 - .5Y = Y – 15,300/P Or Y = 400 + 10,200/P Equilibrium Values : Substitute Y = 1000 into AD curve, 1000 = 400 + 10,200/P, and Solve for P = 17. Substitute Y = 1000 into IS Curve to get r = (600 – (.5)(1000))/1000 = .1. Substitute Y = 1000 and r = .1 into the consumption function to get C = 250 + .5(1000 – 200) – 500(.1) = 600 Substitute r = .1 into the investment function to get I = 250 – 500(.1) = 200 (b.) IS Curve: Doesn’t change: r = (600 - .5Y)/1000 LM Curve : M/P = .5Y – 500(r + 0) so r = (.5Y – M/P)/ 500 = (.5Y – 9000/P)/ 500 AD Curve : Simultaneously solve LM and IS to get rid of r. (600 - .5Y)/1000 = (.5Y – 9000/P)/ 500

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E304SP07Hw9Ans - The Pennsylvania State University...

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