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ECON 1110 Problem Set 06

ECON 1110 Problem Set 06 - Which economy had the more...

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ECON 1110 Intermediate Macroeconomics Problem Set 6 Spring 2011 1. Suppose you have two countries with two different economies, A and B, such that: Economy A: 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 Economy B: C = 60 + 0.8( Y T ) I = 150 – 5 r G = 250 T = 200 M s = 100 M d = 40 + 0.1 Y – 10 r a) Which economy has the flatter IS curve? Why? b) Calculate equilibrium income and interest rate for each economy. (Note that economy A is the same as for problem set 5—you already solved it.) c) Suppose that both countries try a fiscal expansion such that G increases by 50 to 300 in both economies. Calculate the new equilibrium levels of income and interest rates in each economy.
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Unformatted text preview: Which economy had the more effective policy? 2. Suppose that economy A is as given above but economy B is given by: C = 60 + 0.8( Y – T ) I = 150 – 10 r G = 250 T = 200 M s = 100 M d = 40 + 0.1 Y – 20 r a) Which country has the steeper LM curve? Why? b) Calculate equilibrium income and interest rate for each economy. (Again, you have A done already.) c) Suppose both countries try a monetary contraction, such that the money supply is decreased by 20 to a new value of 80. Calculate the new equilibrium income and interest rates for each economy. For which country is the monetary contraction more effective at decreasing income?...
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