Answers to Quiz #4

According to the IS-LM model, what happens in the mulct run to the interest ordinate, income, consumption, and investment under the following circumstances? (Assume everything else is held constant. ) a. The important bank decreases the money supply. i. The interest rate ________ additions_______________________ ii. Income ____________decreases__________________________ iii. Consumption ___________decreases______________________ iv. investment funds ___________decreases________________________ b. The organisation decreases its train of expenditures. i. The interest rate _________decreases______________________ ii.Income ___________decreases___________________________ iii. Consumption __________decreases_______________________ iv. Investment ___________increases________________________ c. The government imposes a new lower level of taxes. i.The interest rate _________increases______________________ ii. Income ________________increases______________________ iii. Consumption ______ _____increases______________________ iv. Investment ______________decreases_____________________ d. The government increases government spending while at the same cartridge holder it increases taxes by exactly the same amount. .The interest rate __________increases_____________________ ii. Income _____________increases but by less than the tack in government spending and the change in taxes_________________________ iii. Consumption __________decreases_______________________ iv. Investment ______________decreases_____________________ 2. Use the following study to answer this good deal of questions. An economy can be described by the following equations C = two hundred + 0. 75(Y T) I = cc 25r G = 100 and is constant and exogenously intractable T = 100 and is constant and exogenously determinedThe demand for real money balances = M/P = Y 100r M = money supply = gramme P = price level = 2 a. Write an equation for the IS bender for this economy. IS Y = cc + 0. 75(Y T) + G + I Y = two hundred + 0. 75Y -0. 75(100) + 100 + cc 25r Y = 500 + 0. 75Y -75 25r .25Y = 425 25r Y = 1700 100r b. Write an equation for the LM plication for this economy. Supply of real money balances = demand for real money balances 1000/2 = Y 100r Y = 500 + 100r c. What is the remainder interest rate and the ableiser level of return for this economy given the above information? 00 + 100r = 1700 100r 200r = 1200 r = 6 Y = 500 + 100 (6) Y = 1100 d. What is the counterbalance level of consumption and the equilibrium level of investment for this economy? C = 200 + 0. 75(Y T) C = 200 + 0. 75(1100 100) C = 200 + 0. 75(1000) C = 200 + 750 C = 950 I = 200 25r I = 200 25(6) I = 200 150 I = 50 e. Suppose that the money supply is increase to 1200. What is the new equilibrium level of interest rate and the new equilibrium level of output for this economy given this change? What is the new equilibrium level of consumption? The new LM wreathe is Y = 600 + 100r and the IS curve is Y = 1700 100r.Thus, 600 + 100r = 1700 100r 200r = 1100 r = 5. 5 Y = 600 + 100(5. 5) Y = 1150 C = 200 + 0. 75(Y T) C = 200 + 0. 75(1150 100) C = 200 + 987. 50 f. Suppose that the sign information is true (no change in the money supply). If government purchases increase to 150, what is the change in output predicted by the Keynesian Cross draw? What is the actual change in output based upon the IS-LM model? The change in output predicted by the Keynesian Cross diagram is equal to (1/(1 MPC))(change in government spending) or (1/0. 25)(50) = 200.The actual change in output based upon the IS-LM model will be less than this. To see this you study to first write the new IS curve Y = C + I + G Y = 200 +0. 75(Y T) + I + G Y = 200 + 0. 75Y 0. 75(100) + 200 25r + 150 0. 25Y = 475 25r Y = 1900 100r Then, combine this IS curve with the LM curve to have 1900 100r = 500 + 100r 1400 = 200r r = 7 Thus, Y = 1900 100r Y = 1900 100(7) Y = 1200 The change in output is from the initial l evel of 1100 to the new level of 1200, or a change of 100 which is less than that predicted by the Keynesian Cross diagram.