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EC111Class14Questions - (c Derive the LM curve for this...

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EC111 MACROECONOMICS Spring Term 2012 EC111 Class Exercise 14 1. (a) What is the important prediction of the Quantity Theory of Money and what are the key assumptions that underlie this. (b) Explain why an increase in the money supply (for a given level of national income) increases the price of bonds. 2. A macroeconomy is described by the following relationships: Consumption: C = 1000 + 0.75Y d - 20r Investment: I = 300 - 10r (where r is the interest rate) Government expenditure: G = 100 Disposable income: Y d = (2/3)Y Money demand: M D = 100 + 2Y – 20r Money supply: M S = 1500 (Prices P are constant and equal to one.) (a) Derive the IS curve for this economy. (b) Find equilibrium income in the goods market when r = 30.
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Unformatted text preview: (c) Derive the LM curve for this economy. (d) Find the required equilibrium income for the money market when r = 30. Is this an equilibrium in the economy? What is the government budget deficit? (e) If full employment income is Y = 1600, at what level should the government set spending G to reach full employment? (f) What alternative policy could the government use to reach full employment? 3. (a) Examine the conditions under which the IS curve will be steep or flat. (b) Examine the conditions under which the LM curve will be steep or flat (c) Explain the implications of your answers to (a) and (b) for the debate between Keynesians and monetarists....
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