macro_questions

# 1 part b aggregate demand 1 assume that the following

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[Part B] Aggregate Demand (1) Assume that the following model of the closed economy in the short run, with the price level ( P ) is fixed at 1.0. r is measured as a percent: C = 170 + 0 . 6( Y - T ) T = 200 I = 100 - 4 r G = 350 M d P = 0 . 75 Y - 6 r M s = 735 (a) Write a numerical formula for the IS curve, showing Y as a function of r alone (b) Write a numerical formula for the LM curve, showing Y as a function of r alone (c) What are the short-run equilibrium values of Y , r , and private saving ( S p = Y - T - C )? (d) Now express both the IS and LM equations in terms of r . What are their slopes? (e) At the equilibrium level of real output, what is the value of the government budget surplus? run? (f) Suppose that G increases by 36 to 386. Derive the new IS and LM equations. (g) According to your answer in (f) above, by how much does Y increase? (2) Use IS - LM model to answer the following questions (a) Many economists believe that consumption expenditures depend on household wealth in addition to disposable income. If this were true, how would the US stock market decline in the early 2000s have affected Y and r ? (b) In 1993, President Clinton proposed reducing the federal budget deficit by increasing net taxes and reducing government spending. Analyze the effects of this mix of fiscal policies on Y and r . (c) Suppose policymakers want to raise investment but keep real GDP constant. Illustrate what mix of monetary and fiscal policies would achieve this goal (d) Several economists believe that the money supply M tends to increase as the interest rate increases. How this tendency would affect the slope of the
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