AllChapter4problems

# AllChapter4problems - Answers to Problems in Textbook 1 a...

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Answers to Problems in Textbook 1. a. The real demand for money at each combination of the interest rate and income is given in the following table: Income Interest rate 11,940 12,000 12,060 12,120 12,180 4.4 2,765 2,780 2,795 2,810 2,825 4.7 2,750 2,765 2,780 2,795 2,810 5.0 2,735 2,750 2,765 2,780 2,795 5.3 2,720 2,735 2.750 2,765 2,780 5.6 2,705 2,720 2.735 2,750 2,765 5.9 2,690 2,705 2.720 2,735 2,750 6.2 2,675 2,690 2,705 2,720 2,735 b. The horizontal axis of your graph should be labeled real money balances, and the vertical axis of your graph should be labeled interest rate. The points on demand for money curve when income equals 11,940 are: (2,675, 4.4); (2,750, 4.7); (2,735, 5.0); (2,720, 5.3); (2,705, 5.6); (2,690, 5.9); and (2,675, 6.2). The points on demand for money curve when income equals 12,180 are: (2,825, 4.4); (2,810, 4.7); (2,795, 5.0); (2,780, 5.3); (2,765, 5.6); (2,750, 5.9); and (2,735, 6.2). c. The table in Part a shows that given that the real money supply equals 2,750, the real demand for money and the real supply of money are equal at the following combinations of real income and the interest rate: (11,940, 4.7); (12,000, 5.0); (12,060, 5.3); (12,120, 5.6); and (12,180, 5.9). The horizontal axis of your graph for the LM curve should be labeled real income, and the vertical axis of your graph should be labeled interest rate. The five points on LM 0 are listed in the first sentence of this part of the problem. d. The table in Part a shows that given that the real money supply equals 2,780, the real demand for money and the real supply of money are equal at the following combinations of real income and the interest rate: (12,000, 4.4); (12,060, 4.7); (12,120, 5.0); and (12,180, 5.3). The four points on LM 1 are just listed in the previous sentence of this part of the problem. e. The table in Part a shows that given that the real money supply equals 2,720, the real demand for money and the real supply of money are equal at the following combinations of real income and the interest rate: (11,940, 5.3); (12,000, 5.6); (12,060, 5.9); and (12,120, 6.2). The four points on LM 2 are just listed in the previous sentence of this part of the problem. 2. a. The marginal propensity to save, s , equals 1 - c = 1 - .6 = .4. The multiplier, k , equals the inverse of the marginal propensity to save. Therefore, the multiplier equals 1/.4 = 2.5. b. The equation for autonomous planned spending, A p , equals 2,180 - 20 r - .6(1,800) + 2,400 - 60 r + 2,000 - 300 = 5,200 - 80 r . c. The equation for the IS curve is Y = kA p . Given the answers to Parts a and b of this problem, we have that the equation for the IS curve is Y = 2.5(5,200 - 80 r ) = 13,000 - 200 r . Given the interest rate equals 4.7, equilibrium income in the commodity market equals 13,000 - 200(4.7) = 12,060. Given the interest rate equals 5.0, equilibrium income in the commodity market equals 13,000 - 200(5.0) = 12,000. Given the interest rate equals 5.3, equilibrium income in the

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AllChapter4problems - Answers to Problems in Textbook 1 a...

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