Question
5.1. You are given the following information about an economy: Autonomous consumption is $100 billion; autonomous investment is $500 billion; The marginal propensity to consume
5.1. You are given the following information about an economy: Autonomous consumption is $100 billion; autonomous investment is $500 billion; The marginal propensity to consume is 0.75; The coefficient on interest in the marginal efficiency of investment function is 10; the demand for money function takes the form: MD = 0.5Y - 15r, where Y is the economy's real output and r is the interest rate expressed as a percentage; and the real money supply is $850 billion. 5.1.1. Find the equations of the IS curve. (4) 5.1.2. Find the equations of the LM curve. (4) 5.1.3. Solve for the equilibrium level of output and interest rate. (3) 5.2. Suppose autonomous investment increases by $35 billion. 5. 2,1 Calculate the new equilibrium income and interest rate? (3) 5 .3.1. Using appropriate diagrams compare the effectiveness of fiscal policy in 5.1.1 The liquidity trap; (3) 5.1.2. The Classical range. (3)
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