100b08ps2a

# 100b08ps2a - Answer Key to Problem Set 2 Econ 100B Prof....

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Answer Key to Problem Set 2 Econ 100B Prof. K.Kletzer Question 1 c) To solve for the equilibrium interest rate, we equate the RHS of parts (a) and (b). e) Substitute equation from part (d) into the consumption equation and equations from parts (c) and (d) into the investment equation.

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Question 2 a) An increase in G (or a decrease in T) is a Fiscal Expansion. Following the same steps as in parts (a)-(e) with G = 2,400; i = 6% Y = 12,000 I = 1200 Expansionary fiscal policy increases both the interest rate and output (in the short run). This is clearly seen from the rightward shift of the IS curve in the IS-LM diagram. Here, total increase in output (\$1,000) is due to increase in consumption (\$600) and government expenditure (\$400), but investment is the same. So, there is no crowding out effect.
M/P=8,000; i = 4% Y = 12,000 I = 1600 Expansionary monetary policy decreases the interest rate and raises output (in the short run). We also observe here that because of the decline in interest rate (i), investment (I) goes up (from 1200 to 1600). The effect of this expansionary monetary policy can be seen from the downward shift of the LM curve in the IS-LM diagram:

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## This note was uploaded on 02/08/2011 for the course ECON 100B taught by Professor Yisun during the Spring '07 term at UCSC.

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100b08ps2a - Answer Key to Problem Set 2 Econ 100B Prof....

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