Assume that the equilibrium in the money market may be described as MP 05 Y 100

# Assume that the equilibrium in the money market may

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13.Assume that the equilibrium in the money market may be described as M/P= 0.5Y– 100rand M/Pequals 800.a. Write the LMcurve two ways, expressing Yas a function of rand ras a function of (Hint: Write the LMcurve only relating Yand r; substitute out M/P , Y . .) Y . b. What is the slope of the LMcurve? c. If ris 1 percent, what is Yalong the LMcurve? If ris 3 percent, what is Yalong the LMcurve? If ris 5 percent, what is Yalong the LMcurve? d. If M/Pincreases, does the LMcurve shift upward and to the left or downward and to the right? e. If Mincreases and Pis constant, does the LMcurve shift upward and to the left or downward and to the right? f. If Pincreases and Mis constant, does the LMcurve shift upward and to the left or downward and to the right? 14.Two identical countries, Country A and Country B, can each be described by a Keynesian- 4 CHAPTER 11 REVIEW QUESTIONS
B cross model. The MPCis .9 in each country. Country A decides to increase spending by \$2 billion, while Country B decides to cut taxes by \$2 billion. In which country will the new equilibrium level of income be greater? 15.a. Suppose Congress decides to reduce the budget deficit by cutting government spending.Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: i. the axes; ii. The curves; iii. The initial equilibrium values; iv. The direction the curve shifts; and v. theterminal equilibrium values. b. Explain in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.