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# ex5 sol - The money supply M is 1,000 and the price level P...

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Macroeconomics 2 Professor Brindusa Anghel Exercises 5 Solution. 1.Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, in many countries (including the United States) taxes depend on income. Let’s represent the tax system by writing tax revenue as where and t are parameters of the tax code.The parameter t is the marginal tax rate: if income rises by \$1, taxes rise by t \$1. a. How does this tax system change the way consumption responds to changes in GDP? b. In the Keynesian cross, how does this tax system alter the government-purchases multiplier? c. In the IS LM model, how does this tax system alter the slope of the IS curve?

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2. Consider the economy of Hicksonia. a. The consumption function is given by C = 200 + 0.75( Y - T ). The investment function is I = 200 - 25 r . Government purchases and taxes are both 100. For this economy, graph the IS curve for r ranging from 0 to 8. b. The money demand function in Hicksonia is

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Unformatted text preview: The money supply M is 1,000 and the price level P is 2. For this economy, graph the LM curve for r ranging from 0 to 8. c. Find the equilibrium interest rate r and the equilibrium level of income Y . d. Suppose that government purchases are raised from 100 to 150.How much does the IS curve shift? What are the new equilibrium interest rate and level of income? e. Suppose instead that the money supply is raised from 1,000 to 1,200. How much does the LM curve shift? What are the new equilibrium interest rate and level of income? f. With the initial values for monetary and fiscal policy, suppose that the price level rises from 2to 4.What happens? What are the new equilibrium interest rate and level of income? g. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if fiscal or monetary policy changes, as in parts (d) and (e)?...
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