Exercise on MACROECONOMIC POLICY

Answer the below questions and provide diagram if question needed. Please use type no handwriting

(f) An economy is described by the following equations: C = 200 + 0.5(Y - T) I = 1000 - 200r G = 300;T = 200 M\" / P = 0.5Y 100r M5 = 1600;P = 2 (a) Write an equation for the IS curve and draw a diagram to illustrate. (3 marks) (b) Write an equation for the LM curve and draw a diagram to illustrate. (3 marks) (0) Solve for the equilibrium values of the interest rate rand income Y. Verify your calculations diagrammatically. (4 marks) (d) Suppose that government purchases (G) increase to 400. What happens to equilibrium income and the interest rate? What is the amount of crowding out in this case? Draw a diagram to illustrate. (10 marks) (6) Suppose money demand depends on the level of income only M\" / P = 0.5Y. What does this imply about the slope of the LM curve? What does it imply about the ability of scal policy to change output? Explain. (10 marks) Suppose there is a decrease in the marginal propensity to consume. The consumption function becomes C = 200 + 0.2(Y '1'). What happens to equilibrium income and the interest rate? Explain. (1 0 marks)