# D write the numerical aggregate demand curve for this

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Chapter 27 / Exercise 5
Exploring Economics
Sexton Expert Verified
d.Write the numerical aggregate demand curve for this economy, expressing Yas a function of G, T, and M/P110.Assume that an economy is described by the IScurve Y= 3,600 + 3G– 2T– 150rand theLMcurve Y= 2 M/P+ 100r[or r= 0.01Y– 0.02(M/P)]. The investment function for this economy is 1,000 – 50r. The consumption function is C= 200 + (2/3)(YT). Long-run equilibrium output for this economy is 4,000. The price level is 1.0 and M= 1,200.a.Assume that government spending is fixed at 1,200. The government wantsto achieve a level of investment equal to 900 and also achieve Y= 4,000. What level of ris needed for I= 900? What levels of Tand Mmust be set to achieve the two goals? What will be the levels of private saving, public saving, and national saving? (Hint: Check C+ I+ G= b.Now assume that the government wants to cut taxes to 1,000. With Gset at 1,200, what will the interest rate be at Y= 4,000? What must be the value of M? What will Ibe? What will be the levels of private, public, and national saving? (Hint: Check C+ I+ G= c.Which set of policies may be referred to as tight fiscal, loose money? Which set of policies may be referred to as loose fiscal, tight money? Which “policy mix” most encourages investment?111.Suppose the government wishes to reduce the budget deficit by reducing government spending. Use the ISLMmodel to illustrate graphically the impact of the reduction in government spending on output and interest rates. Be sure to label: i. the axesii. the curvesiii. the initial equilibrium valuesiv. the direction the curves shiftv. the terminal equilibrium values.112.Suppose the government passes legislation that reduces taxes. Use the ISLMmodel to illustrate graphically the impact of the tax reduction on output and interest rates. Be sure to label: i. the axesii. the curvesiii. the initial equilibrium valuesiv. the direction the curves shiftv. the terminal equilibrium values.113.How can the Bank of Canada keep the economy from falling into a recession if the budget deficit is reduced? Use the ISLMmodel to illustrate graphically the impact of both the fiscal policy reducing the deficit and the monetary policy, which prevents output .Y.)Y.)Page 24
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Chapter 27 / Exercise 5
Exploring Economics
Sexton Expert Verified
from falling. Be sure to label: i. the axesii. the curvesiii. the initial equilibrium valuesiv. the direction the curves shiftv. the terminal equilibrium values.114.Use the ISLMmodel to illustrate graphically the impact on output and interest rates of a one-time increase in the price level due to a large increase in oil prices. Be sure to label: i. the axes ii. the curvesiii. the initial equilibrium valueiv. the direction the curves shiftv. the terminal equilibrium values.115.Suppose that people finally realize that they must save a larger proportion of their incomein order to retire and that they simultaneously begin to use new technology, which allows them to reduce their holdings of real cash balances as a proportion of their income. Use the ISLMmodel to illustrate graphically the impact of these two changes in household behavior on output and interest rates. Be sure to label: i. the axesii. the curves
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