Week_5 Homework

# Week_5 Homework - Week 5 EC301 2 011 Problem 5-1(a-e...

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Week 5 EC301 2 011 Problem 5-1 (a-e) Suppose that the equation for autonomous planned spending, A p , is A p = 6,200 – 200r and the value of the multiplier, k, 2.5. (a) Derive the equation for the IS curve, Y=kA p . Graph the IS curve for interest rates between 0 and 8, with intervals of one-half of a percentage point. Given A p = 6200- 200r and k=2.5, The IS curve is given by, Y=kA p = 15500 – 500r.

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Week 5 EC301 2 011 r Y 0 15500 0.5 15250 1 15000 1.5 14750 2 14500 2.5 14250 3 14000 3.5 13750 4 13500 4.5 13250 5 13000 5.5 12750 6 12500 6.5 12250 7 12000 7.5 11750 8 11500 (b) Suppose the equation for the LM Curve is Y=13,500 +100r. Use this equation to explain the level of income at which there is a zero lower bound on the federal funds rate, the interest rate that the Fed controls.
Week 5 EC301 2 011 The zero lower bound occurs when r =0, i.e. Y= 13500. (c) Graph the LM curve for interest rates between 0 and 8, with intervals of one-half of a percentage point. LM curve is the green line.

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Week_5 Homework - Week 5 EC301 2 011 Problem 5-1(a-e...

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