Part I: Initial Conditions Suppose the economy can be characterized by the following set of equations: (1) L1 = 0.2Y (5)1 = 180 1.5r (2) L2 = 250 25r (6)S =-35+0.1(Y - T) B)m=75 (7)T = 100 + 0.06Y (4) MB = 90 (8) G = 150 1. Use the money market-clearing condition to find the LM function and the Z-D equilibrium condition to find the IS function. 2. Calculate the equilibrium values of r, , I, S, C, T, L1, L2, and (G-T). Part I1: Shock to Business Confidence Suppose a public health response to a novel virus leads to corporate executives and small business proprietors being concerned about a sustained period of low profits: i.e., business confidence decreases. The economy now can be characterized by the following set of equations: (1) L1 = 0.2Y (5) = 140 1.5r (2) L2 = 250 25r (6)S =-35+0.1(Y - T) B3)m=75 (7) T = 100 + 0.06Y (4) MB = 90 (8) G = 150 3. Use the Z-D equilibrium to find the new IS function. 4. Calculate the equilibrium values of r, , I, S, C, T, L, L>, and (G-T). 5. Compared to the initial conditions, which variables increased and which variables decreased? Part I11: Shock to Wealth-Holder Confidence Suppose despite the contraction caused by the public health measures, wealth-holders were comforted by policy responses and become less disquieted; i.e., wealth-holder confidence increases. The economy now can be characterized by the following set of equations: (1) L1 = 0.2Y (5)1 = 180 1.57 (2) L2 = 215 25r (6)S = 35+0.1(Y = T) B)ym=175 (7) T = =100 + 0.06Y (4) MB = 90 (8) G = 150 6. Use the money-market clearing condition to find the new LM function? 7. Calculate the equilibrium values of r, Y, I, S, C, T, L;, L2, and (G-T). (Note: this set of conditions corresponds to the IS function of the initial conditions). 8. Compared to the initial conditions, which variables increased and which variables decreased? Part IV: Shock to Bankers Confidence Suppose bankers become weary of loan applicants' abilities to service bank loans: i.e., bankers confidence decreases. (1) L1 =0.2Y (5)1 = 180 1.5r (2) L2 = 250 25r (6)S =-35+0.1(Y - T) (3)m=6.5 (1) T = 100 + 0.06Y (4) MB = 90 (8) G = 150 9. Use the money-market clearing condition to find the new LM function? 10. Calculate the equilibrium values of r, Y, I, S, C, T, L1, L2, and (G-T). (Note: this set of conditions corresponds to the IS function of the initial conditions). 11. Compared to the initial conditions, which variables increased and which variables decreased