401ps2-10 - ECON 401A Autumn 2010 PROBLEM SET II (for...

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ECON 401A Hartman Autumn 2010 PROBLEM SET II (for Thursday, October 14) In what follows we use the following notation: Y real aggregate output N labor K capital W nominal wage rate P price level C real consumption T real (lump sum) taxes I real investment r real interest rate measured as a percent i nominal interest rate measured as a percent G real government purchases M nominal money stock 1. This problem involves a simple specification of an IS - LM model where P is fixed exogenously. Assume no inflation is expected so the real and nominal interest rates are the same, i.e ., 0 e  so ir . Suppose that the consumption function is C Y T Y T () .  10 8 , that the investment demand function is I r r  65 4 , and that the demand function for real money balances is L Y r Y r (,) 21 0 . a. Use the IS-LM approach to find the equilibrium levels of Y and r in terms of the exogenous parameters, P , M , G , and, T . What happens to the equilibrium levels of Y and r if G
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401ps2-10 - ECON 401A Autumn 2010 PROBLEM SET II (for...

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