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5 EC301 2 011 Problem Week 5 - 5 EC301 2 011 Problem Week...

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5 EC301 2 011 Problem Week 5-1 (a-e) Suppose that the equation for autonomous planned spending, Ap, is Ap = 6,200 200r and the value of the multiplier, k, 2.5. (a) Derive the equation for the IS curve, Y=kAp. Graph the IS curve for interest rates between 0 and 8, with intervals of one-half of a percentage point. Given Ap = 6200- 200r and k=2.5, The IS curve is given by, Y=kAp = 15500 500r. Week 5 EC301 2 011 r Y 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 15500 15250 15000 14750 14500 14250 14000 13750 13500 13250 13000 12750 12500 12250 12000 11750 11500 (b) Suppose the equation for the LM Curve is Y=13,500 +100r. Use this equation to explain the level of income at which there is a zero lower bound on the federal funds rate, the interest rate that the Fed controls. Week 5 EC301 2 011 The zero lower bound occurs when r =0, i.e. Y= 13500. (c) Graph the LM curve for interest rates between 0 and 8, with intervals of one-half of a percentage point. LM curve is the green line. (d) Suppose that the term premium is 1.0 percentage point and the risk premium is 2.0 percentage points. With Figure 5-11
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