Consider a closed economy with the following features: (i) Consumption depends upon disposable income and real interest

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Consider A Closed Economy With The Following Features I Consumption Depends Upon Disposable Income And Real Interest 1 (103.33 KiB) Viewed 29 times

Consider a closed economy with the following features: (i) Consumption depends upon disposable income and real interest rate. (ii) Investment depends upon real interest rate (iii) Tax system is combination of lumpsum taxes as well as a proportional tax rate (iv) Government expenditure are exogenous (v) There are two components to money demand – transaction demand for money and speculative demand for money (vi) Money supply is determined by the central bank exogenously (vii) Price level is exogenously given. (a) Please make appropriate and valid defensible assumptions for the parameters of your economy and represent the economy using the IS-LM equations. (b) Find the equilibrium for the economy and explain it both algebraically and graphically. (c) Derive the fiscal multipliers for the economy. (Hint: First identify the number of fiscal instruments in the economy, and then derive the multiplier for each of those instruments). (d) For each of the above fiscal multipliers, intuitively explain the change in the output and the real interest rate. You may use a graph, if you think that will be useful for your explanation.