Question info:

Given the following IS-LM model that represents the economy:

c^d=500+0.5(Y-T)

I^d=250-600r

M^d/P=0.5Y-600i

i=r+^e

^e=0.06

Where

Y is output, M^d/P is the real demand for money, c^d is desired consumption, i is the nominal interest rate, T is the lumpsum tax. Assume that T=200, Government spending=200, money supply, M=2000 $ P=2.5

1) What are the IS & LM curves? Assume that the goods & asset markets are in equilibrium

a) IS: r=(850-0.5Y)/600; LM: r=(0.5Y-836)/600

b) IS: r=(850+0.5Y)/600; LM: r=(0.5Y+836)/600

c) IS: (850+0.5Y)/600; LM: r=(0.5Y-836)/600

d) IS: (850-0.5Y)/600; LM: r=(0.5Y+836)/600

2) The equilibrium output, Y* & the equilibrium real interest rate r* are closest to:

a) Y*=1614 & r*=0.012

b) Y*=1686 & r*=0.072

c) Y*=1686 & r*=0.012

d)Y*=1614 & r*=0.072

3) What is the equilibrium level of investment,I* & consumption, C*. Is the goods market equilibrium satisfied or does the income-expenditure identity hold?

a) C*=1243 & I*=243

b) C*=1243 & I*=207

c) C*=1207 & I*=207

d)C*=1207 & I*=243

4) If consumer sentiment rises such that the consumption expression now becomes: C^d= 600+0.5(Y-T). What is the new IS curve?

a) r=(950-0.5Y)/600

b) r=(950+0.5Y)/600

c) r=(1150-0.5Y)/600

d) r=(1150+0.5Y)/600

5) Considering the new IS curve in the previous question, determine the change in the IS curve resulting from an increase in consumer sentiment.

a) Becomes steeper

b) Experiences rightward shift

c) Shifts left

d) No change apparent

6) Considering the IS curve in question 4, and assume the LM curve remains unchanged, what is the short-run equilibrium output and r* resulting from an increase in consumer sentiment? Hint: use the general equilibrium condition as a starting point

a) Y*= 1714 & r*=0.155

b) Y*= 1714 & r*=0.095

c) Y*=1786 & r*=0.155

7) Assume the output found in question 2 represents the full employment level. Compare this level of output to the short-run equilibrium to the short-run equilibrium output found in question 6. Determine how firms adjust prices in order for the economy to move towards long-run equilibrium.

a) Firms increase prices

b) Firms decrease prices

c) Price levels unchanged

d) Firms cannot adjust prices

8) If prices do not adjust rapidly enough to move the economy to long-run equilibrium. What fiscal policy may be implemented to shift the economy to a full employment level or long-run equilibrium? Assume the Richardian eqiuvilence doesn't hold. Which curve shifts?

a) Fiscal policy will not be efficient; the LM curve

b) Reduction in taxes; LM curve

c) Government raises its spending; IS curve

d) Governemnt decreases its spending; IS curve