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Econ_202_-_PS3

# Econ_202_-_PS3 - METU Department of Economics Econ 202...

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METU Department of Economics Econ 202 Macroeconomic Theory Instructors: Ebru Voyvoda - Şirin Saraçoğlu 2010-2011 Spring Semester Problem Set 3 Question 1: Assume the following IS-LM model: C = 80 + 2/3Y d M d = 1/2Y + 400 – 20i P = 1 T = 1/4Y + 20 G = 130 I = 250 – 5i M s = 500 TR = 80 a) Derive the IS curve. b) Derive the LM curve. c) Calculate the equilibrium value of income. d) What is the value of the government spending multiplier when interest rates are assumed to be constant? e) Calculate the equilibrium values of investment, tax revenues, and real money demand. f) How much of investment will be crowded out if the government increases its expenditure by ∆G = 100? g) What is the value of the government spending multiplier when interest rates are allowed to vary?

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Question 2: Suppose: C = c 0 + c 1 (Y-T) I = b 0 – b 1 i (M/P) d = m 1 Y – m 2 i G and T are constant a) How should the parameters b 1 , m 1 , and m 2 be interpreted? b) Use the IS-LM model to graphically determine the effectiveness of fiscal versus monetary policy when investment is very sensitive to changes in i, and money demand is very insensitive to changes in i. c) Now suppose that the government imposes a tax, t 1 , on income, so that the following is true: T = t 0 +t 1 Y, 0<t 1 <1 If money demand is very insensitive to changes in the interest rate, is a decrease in the
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Econ_202_-_PS3 - METU Department of Economics Econ 202...

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