Question 3

The following equations describe a small, closed economy. Figures are in millions of dollars;interestrate(i)is in percentperannum. Assumethat thepricelevelis fixed.

The IS-LM Model

GoodsMarket MoneyMarket

C= Co+ cYD (Privateconsumption) (M/P)^d= kY- hi(Demand forrealbalances)

YD=Y+ TR -T (Disposableincome) (M/P)^s=Mo/P (Real moneysupply)

T =To+tY (Totaltaxes) (M/P)^d=(M/P^s(Money mkt. eq. condition)

I= Io - bi (Privateinvestment)

G=Go, TR=TRo (Govt.Expenditure&Transfers)

Y=C +I +G (Goodsmkt.eq.condition)

Endogenous Variables:C,YD, T, I,Y,i,M^d andM^s

Exogenous Variables:Co= 350, To= 80,Io = 250,Go = 150,TRo =50,

Mo=400and P=1

Parameters: c =0.80, t=0.2, b =50, k =0.25 and h=50

Policyvariables: Fiscal policy:(G,t andTR),Monetarypolicy:(Mo,P)

a) Solve for Y* and i*

b) Compute the impact of a rise in G to 200 on Y and I and determine the level of crowding out.

c) Calculate the new Y and i resultant from the fiscal expansion above.

d) Determine the accommodative change in money supply required to deal with the crowding out effect in b above and sketch in an IS-LM space with correct values.

Please I need this in 1 hour. Kindly send the answers fast