Assignment 2

Assignment 2 - The Chinese University of Hong Kong...

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1 The Chinese University of Hong Kong 2008-2009 First Term Econ 1021A/B: Basic Macroeconomics Assignment 2 Due date: Oct 21 (Tue), 4:00 p.m ± Please put your assignment into my “Assignment Box” on the ELB 9 th floor . Late submissions will not be graded . ± Write student name(s), student number(s) and group number (if any). If questions require calculations, you need to show all steps. The notations are the same as the ones defined in the textbook, except where otherwise noted . 1. Consider the economy characterized by the following equations. C=200+0.75(Y-T) I=200-25i G=100 T==100 M d /P=Y-100i M/P =500 a. Derive the IS relation with Y on the left side and everything else on the right. b. Derive the LM relation with i on the left side and everything else on the right. c. Find the equilibrium interest rate and the equilibrium level of income (output) using the IS and LM relations. d. Suppose that the government spending is raised from 100 to 150. i)How much does the IS curve shift? ii)What are the new equilibrium interest rate and the level of income? iii)Without calculations, what do you think the effects of an increase in the government spending on consumption and investment? Explain your answers. iv)Now, compute the values of the changes in consumption and investment. e. Suppose that the real money supply is raised from 500 to 600. i)How much does the LM curve shift? ii)What are the new equilibrium interest rate and the level of income? iii)Without calculations, what do you think the effects of an increase in the real money supply on consumption and investment? Explain your answers. iv)Now, compute the values of the changes in consumption and investment. 2.
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This note was uploaded on 02/19/2011 for the course ECON 1021 taught by Professor Kokwanwai during the Fall '08 term at CUHK.

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Assignment 2 - The Chinese University of Hong Kong...

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