1. Assume the following model of the economy, with the price level fixed at 1.0: T = 600 C = 0.6(Y – T) I = 400 - 100r G

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1 Assume The Following Model Of The Economy With The Price Level Fixed At 1 0 T 600 C 0 6 Y T I 400 100r G 1 (64.18 KiB) Viewed 52 times

1. Assume the following model of the economy, with the price level fixed at 1.0: T = 600 C = 0.6(Y – T) I = 400 - 100r G= 600 Ms= 400 Md=Y - 150r P a) b) c) Write numerical formulas for the IS and LM curves, showing Y as a function of r alone in both cases. What are the short-run equilibrium values of Y, r and private saving? Suppose MS is increased to 800. What are the new values of Y and r? Draw a diagram and explain what will happen. 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. d)