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ECON 1110 Problem Set 05

ECON 1110 Problem Set 05 - Y – 10 r a Find the equation...

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ECON 1110 Intermediate Macroeconomics Problem Set 5 Autumn 2010 1. Explain the Keynesian theory of interest rate determination. What differences do you see between this theory and the classical theory of the interest rate? 2. What are Keynes’ three motives for holding money demand? Explain each motive briefly. 3. What variables will shift the LM curve? Explain (graphically and verbally) the way in which a change in each variable shifts the LM curve. 4. Why is the slope of the LM curve positive? 5. Suppose money supply is fixed at 100 and money demand is given by: M d = 40 + 0.1
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Unformatted text preview: Y – 10 r a) Find the equation for the LM curve. b) Suppose the coefficient on r changes to 5. Will the LM curve become flatter or steeper as a result? 6. Demonstrate graphically and verbally how a decrease in government expenditures will shift the IS curve. 7. Suppose that C = 60 + 0.8( Y – T ) I = 150 – 10 r G = 250 T = 200 M s = 100 M d = 40 + 0.1 Y – 10 r a) Write the equations for the IS and LM curves (you already did the LM curve in question 5a.) b) Find the equilibrium values for income (Y) and the interest rate ( r )....
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