{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Problem set 7 F06

# Problem set 7 F06 - of investment and the equilibrium Y...

This preview shows pages 1–2. Sign up to view the full content.

Problem set #7 1. Suppose that the following equations describe the money market: Md/P=0.8Y-16r Ms/P=800 Y=1100 a) Draw the money demand and money supply curves in a simple graph. b) Find the equilibrium interest rate by setting Ms/P=Md/P and solving for r. c) Suppose now that Y increases to Y=1,400. How would this change affect the money market? d) Derive the LM curve graphically. Show on a graph and explain how the changes from part c) would affect the LM curve. 2. Suppose you are given the following information: C=500+0.8Y I=100-3000r G=200 X-M=0 a) Set up the equation of the AE curve by plugging the given numbers in the equation AE=C+I+G+X-M. b) If the real interest rate is 2% (r=0.02), calculate the corresponding level of investment I. Then set AE from part a) equal to Y and solve for Y. Draw a simple graph of the AE and the 45 degree line to illustrate the situation. c) Suppose now that real interest rate increases to 4%. Calculate the level

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: of investment and the equilibrium Y again and show the changes on the graph from part a). d) Draw a graph of the relationship between r and Y resulting from parts b) and c). How do we call this curve? e) Suppose now that at the given real interest rate r=0.02 the government increases its spending by 100 to G=300. Show graphically the resulting changes in the AE and the IS curve and explain in words. 3. Suppose that the following equations describe an economy: C=170+0.6Y I=100-4r G=350 Md/P=0.75Y-6r Ms/P=735 a) Derive the equation for the IS curve by setting Y=AE=C+I+G. b) Derive the equation for the LM curve by setting Ms/P=Md/P. c) Calculate the equilibrium levels of Y and r by setting IS=LM. d) If the Fed decides to use expansionary monetary policy, so that Ms increases, what will happen in the IS/LM Model? Explain and show graphically....
View Full Document

{[ snackBarMessage ]}