Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume that the Hicksonia's economy is described by the following information: Y = 5000 - 100rIS curve equation Y = 3000 + 100rLM curve equation

Assume that the Hicksonia's economy is described by the following information:

Y = 5000 - 100rIS curve equation

Y = 3000 + 100rLM curve equation

S=-100+0.2 (Y-T)SavingfunctionT=1,000taxes

I = 700 - 20rInvestment functionG = 1,000 government purchases

Money demand functionprice level

The money supply

Use the IS-LM model to analyze the impact of an expansionary fiscal policy in the short and long run as follow:

Suppose that the Hicksonia's economy is in initial equilibrium as determined by the given IS and LM equations. If thegovernment decided to follow an expansionary fiscal policy through increasing government purchases (G) by 200.

1)what is the numerical value of the crowding-out effect of the increase in government expenditure?

Assume that the long-run equilibrium income in this economy is= 4000.The effect of the previous expansionary fiscal policy on the economy will depend on how the central bank reacts to this policy.

2)If the central bank decided to hold the money supply constant, how much is the price level in the long run.

3)If the central bank decided to change the money supply to close the income gap so quickly, which is appeared after applying the fiscal policy. how much should the central bank change (increase or decrease) the money supply to get the economy back to the long-run income level?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Crashed How A Decade Of Financial Crises Changed The World

Authors: Adam Tooze

1st Edition

0143110357, 9780143110354

More Books

Students also viewed these Economics questions

Question

=+What kind of study is this?

Answered: 1 week ago