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Question 5 [6 marks] The following equations describe an IS-LM model, where Y is real income ($b) and i is the real interest rate (%).
Question 5 [6 marks] The following equations describe an IS-LM model, where Y is real income ($b) and i is the real interest rate (%). Y = 2300-120i (IS curve) Y = 700+30i (LM curve) a) Compute i and Y using Cramer's rule (2 marks) b) If government spending is increased by $10b, determine the resulting crowding-out effect on private investment if di =-30 . Assume ac = 1.5 (2 marks) dI c) If interest rate reaction to monetary policy is di =-0.03 justify the quantum of dM open market operations required to dampen any crowding-out effect in (b) (2 marks)
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