Assume the following model of the economy, with the price level fixed at 1.0: 𝐶 = 0.6(𝑌 − 𝑇) 
Posted: Thu May 19, 2022 7:50 am
Assume the following model of the economy, with the price level
fixed at 1.0:
𝐶 = 0.6(𝑌 − 𝑇)
𝑇 = 600
𝐼 = 400 − 100𝑟
𝐺 = 600
𝑀𝑠 = 400
𝑀𝑑 /𝑃 = 𝑌 − 150𝑟
a) Write numerical formulas for the IS and LM curves, showing Y
as a function of r alone in both cases. (20%)
b) What are the short-run equilibrium values of Y, r and private
saving? (30%)
c) Suppose MS is increased to 800. What are the new values of Y
and r? Draw a diagram and explain what will happen. (20%)
d) What would the government need to do to keep a balanced
budget, keep investment at 200 but increase Y to 1200? Draw a
diagram and explain what will happen. (30%)
fixed at 1.0:
𝐶 = 0.6(𝑌 − 𝑇)
𝑇 = 600
𝐼 = 400 − 100𝑟
𝐺 = 600
𝑀𝑠 = 400
𝑀𝑑 /𝑃 = 𝑌 − 150𝑟
a) Write numerical formulas for the IS and LM curves, showing Y
as a function of r alone in both cases. (20%)
b) What are the short-run equilibrium values of Y, r and private
saving? (30%)
c) Suppose MS is increased to 800. What are the new values of Y
and r? Draw a diagram and explain what will happen. (20%)
d) What would the government need to do to keep a balanced
budget, keep investment at 200 but increase Y to 1200? Draw a
diagram and explain what will happen. (30%)