A closed economy is described as follows: In this economy, the government always has a balanced budget,
Question:
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In this economy, the government always has a balanced budget, so T = G, where T is total taxes collected.
a. Suppose that M = 4320 and G = 150. Use the classical IS-LM model to find the equilibrium values of output, the real interest rate, the price level, consumption, and investment. (In the classical model, output always equals its full-employment level.)
b. The money supply rises to 4752. Repeat part (a). Is money neutral?
c. With the money supply back at 4320, government purchases and taxes rise to 190. Repeat part (a). Assume, for simplicity, that is fixed (unaffected by G). Is fiscal policy neutral in this case? Explain.
Step by Step Answer:
The IS curve gives Y C I G 600 05 Y T 50r 450 50r G 1050 100r 05Y 05T G or 05Y 1050 100r 05T G or Y ...View the full answer
Macroeconomics
ISBN: 978-0321675606
6th Canadian Edition
Authors: Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Ronald D. Kneebone
