Question
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?
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