12.3

12.3) The following equations describe an economy: a) Identify each of the variables and briefly explain the meaning of each one. b) From the preceding list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph. c) From the preceding list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b). d) What are the equilibrium level of income and the equilibrium interest rate? 12.1) In the Keynesian cross model, assume that the consumption function is given by Planned investment is 200; government purchases and taxes are both 400. a) Graph planned expenditure as a function of income. b) What is equilibrium income? Y=400+.8YY=2000 The equilibrium income will be $2,000. c) If government purchases increase to 420 , what is the new equilibrium income? What is the multiplier for government purchases? a) The new equilibrium income will be $2,100. The multiplier for government purchases is equal to 5.(1/.2) d) Assuming that taxes remain at 400 , what level of government purchases is needed to achieve an income of 2,400 ? The required change in government spending will be $80 e) Assuming that government purchases remain at 400, what level of taxes is needed to achieve an income of 2,400 ? The required change in taxes will be $100 12.2) Suppose the money demand function is (M/P)0=80050r where r is the interest rate, as a percentage. The money supply M is 2,000 , and the price level P is fixed at 5. a) Graph the supply and demand for real money balances. 12.2) Suppose the money demand function is (M/P)0=80050r where r is the interest rate, as a percentage. The money supply M is 2,000 , and the price level P is fixed at 5 . a) Graph the supply and demand for real money balances. b) What is the equilibrium interest rate? 80050r=400r=8% c) What happens to the equilibrium interest rate if the supply of money is reduced from 2,000 to 1,500 ? 80050r=300r=10% d) If the central bank wants the interest rate to be 4 percent, what money supply should it set? 4000250(4)=MM=3000 12.3) The following equations describe an economy: a) Identify each of the variables and briefly explain the meaning of each one. b) From the preceding list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph. c) From the preceding list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b). d) What are the equilibrium level of income and the equilibrium interest rate? 12.3) The following equations describe an economy: a) Identify each of the variables and briefly explain the meaning of each one. b) From the preceding list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph. c) From the preceding list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b). d) What are the equilibrium level of income and the equilibrium interest rate? 12.1) In the Keynesian cross model, assume that the consumption function is given by Planned investment is 200; government purchases and taxes are both 400. a) Graph planned expenditure as a function of income. b) What is equilibrium income? Y=400+.8YY=2000 The equilibrium income will be $2,000. c) If government purchases increase to 420 , what is the new equilibrium income? What is the multiplier for government purchases? a) The new equilibrium income will be $2,100. The multiplier for government purchases is equal to 5.(1/.2) d) Assuming that taxes remain at 400 , what level of government purchases is needed to achieve an income of 2,400 ? The required change in government spending will be $80 e) Assuming that government purchases remain at 400, what level of taxes is needed to achieve an income of 2,400 ? The required change in taxes will be $100 12.2) Suppose the money demand function is (M/P)0=80050r where r is the interest rate, as a percentage. The money supply M is 2,000 , and the price level P is fixed at 5. a) Graph the supply and demand for real money balances. 12.2) Suppose the money demand function is (M/P)0=80050r where r is the interest rate, as a percentage. The money supply M is 2,000 , and the price level P is fixed at 5 . a) Graph the supply and demand for real money balances. b) What is the equilibrium interest rate? 80050r=400r=8% c) What happens to the equilibrium interest rate if the supply of money is reduced from 2,000 to 1,500 ? 80050r=300r=10% d) If the central bank wants the interest rate to be 4 percent, what money supply should it set? 4000250(4)=MM=3000 12.3) The following equations describe an economy: a) Identify each of the variables and briefly explain the meaning of each one. b) From the preceding list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph. c) From the preceding list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b). d) What are the equilibrium level of income and the equilibrium interest rate