Economics 321 Problem Set #2 Rules: Please post your answers on Canvas. Answers will be available shortly after the deadline. I. IS/LM Equilibrium Given the following hypothetical economy: C = 25 +0.5YD. / = 105 - bi, G =210, TA = 10+ 0.251, YD =Y -TA, L = 0.BY - 21, where C is consumption, I is investment, i is the interest rate, G is government spending. TA are taxes, Y'D is disposable income, and Y' is output. L is real money demand. The nominal money supply M is 220, and P. the price level, is exogenous and equal to 1. Assume, momentarily, that interest rates are equal to zero. 1. What is the constant term in the aggregate demand function:(a) 335; (b) 375; (c) 425; (d) 525; 2. What is the slope term in the aggregate demand function: (a) 0.25; (b) 0.55; (c) 0.375; (d) 0.9; Now allow the interest rate to vary. 3. What is the constant term of the IS function: (a) 289; (b) 397; (c) 536; (d) 642; 4. What is the slope term of the IS function:(a) -8; (b) -12; (c) -13.1; (d) -15.2; 5. What is the constant term in the LM function: (a) 150; (b) -150; (c) 110; (d) -1 10; 6. What is the slope term of the LM function: (a) 0.5; (b) 0.6; (c) 0.25; (d) 0.35; 7. What is the level of equilibrium income (a) 472; (b) 572; (c) 435; (d) 678; 8. What is the equilibrium interest rate (a) 2; (b) 4; (c) 6; (d) 8; Suppose a new Federal Reserve chairman is appointed and cuts the money supply back to 100. 9. What is the constant term of the new LM function: (a) -50; (b) -60; (c) 75; (d) 110; 10. What is the slope term of the new LM function: (a) 0.25; (b) 0.45; (c) -0.25; (d) 0.15; 11. What is the new equilibrium interest rate: (a) 16; (b) 28; (c) 42; (d) 12; 12. What is the money multiplier: (a) 5.42; (b) 1.23; (c) 1.33; (d) 2.45; Suppose a new President is elected and intends to maintain output despite the cut in the money supply. 13. What is the new equilibrium interest rate [HINT: You need to figure this out before trying to answer 14: (a) 22; (b) 68; (c) 45; (d) 72; 14. At what level must she set government spending to restore output back to the level in question 7: (a) 429; (b) 342; (c) 12; (d) 510; 15. What is the fiscal multiplier: (a) 0.53; (b) 1.29; (c) 2.43; (d) 0.0;II. Comparative statics Assume that G is 210 and M is 220 as in part I. Solve for the IS or LM expressions, and the fiscal and monetary multipliers, holding the other parameters constant, when you: Raise the marginal propensity to consume to 0.75; 16. What is the constant term of the IS function: (a) 660; (b) 760; (c) 290; (d) 820; 17. What is the slope of the IS function: (a) -11.43; (b) 12.56; (c) 15.62; (d) -5.67; 18. What is the equilibrium level of income (a) 239.6 (b) 125.9; (c) 522.90; (d) 789.3; Hint for all the multiplier questions: Raise G and resolve for Y', and then, using the original G, raise M and resolve for V.] 19. What is the fiscal multiplier: (a) 0.29; (b) 2.9; (c) 0.59; (d) 0.22; 20. What is the money multiplier: (a) 2.92; (b) 0.22; (c) 0.56; (d) 1.48; Raise the interest elasticity of investment to 6; 21. What is the constant term of the IS function: (a) 239; (b) 444; (c) 536; (d) 642; 22. What is the slope of the IS function: (a) -9.60; (b) -2.19; (c) -1.29; (d) 2.87; 23. What is the equilibrium level of income. (a) 432.9; (b) 468.24; (c) 209.9; (d) 237.6; 24. What is the fiscal multiplier: (a) 0.47; (b) 1.47; (c) 2.39; (d) 0.39; 25. What is the money multiplier: (a) 5.7; (b) 0.0; (c) 2.2; (d) 1.41; Raise the income elasticity of money demand to 0.75; 26. What is the constant term of the LM function: (a) -110; (b) -25; (c) -55; (d) -75; 27. What is the slope of the LM function: (a) 0.22; (b) -0.35; (c) 0.38; (d) 0.0; 28. What is the equilibrium level of income. (a) 222; (b) 354; (c) 443; (d) 219; 20. What is the fiscal multiplier: (a) 0.4: (b) 0.5; (c) 08; (d) 0.7; 30. What is the money multiplier: (a) 0.0; (b) 0.2; (c) 0.4; (d) 1.0