Answers to Quiz #4

check to the IS-LM model, what happens in the short run to the engross station, income, consumption, and investment under the pursual band? (Assume everything else is held constant. ) a. The central bank decreases the money grant. i. The pursuit yard ________increases_______________________ ii. Income ____________decreases__________________________ iii. outlay ___________decreases______________________ iv. Investment ___________decreases________________________ b. The establishment decreases its take of expenditures. i. The relate rate _________decreases______________________ ii.Income ___________decreases___________________________ iii. function __________decreases_______________________ iv. Investment ___________increases________________________ c. The establishment imposes a in the buff-made lower level of taxes. i.The interest rate _________increases______________________ ii. Income ________________increases______________________ iii. Consumption ___________incr eases______________________ iv. Investment ______________decreases_____________________ d. The governing body increases brass spending while at the kindred time it increases taxes by exactly the selfsame(prenominal) amount. .The interest rate __________increases_____________________ ii. Income _____________increases but by less(prenominal) than the change in government spending and the change in taxes_________________________ iii. Consumption __________decreases_______________________ iv. Investment ______________decreases_____________________ 2. Use the following learning to answer this set of questions. An economy plunder be described by the following equations C = two hundred + 0. 75(Y T) I = two hundred 25r G = 100 and is constant and exogenously opinionated T = 100 and is constant and exogenously determinedThe necessary for genuine money balances = M/P = Y 100r M = money supply = 1000 P = price level = 2 a. print an equation for the IS wrick for this economy. I S Y = two hundred + 0. 75(Y T) + G + I Y = cc + 0. 75Y -0. 75(100) + 100 + 200 25r Y = vitamin D + 0. 75Y -75 25r .25Y = 425 25r Y = 1700 100r b. Write an equation for the LM yield for this economy. allow of real money balances = demand for real money balances 1000/2 = Y 100r Y = 500 + 100r c. What is the equilibrium interest rate and the equilibrium level of take for this economy given the above education? 00 + 100r = 1700 100r 200r = 1200 r = 6 Y = 500 + 100 (6) Y = 1100 d. What is the equilibrium 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 cl I = 50 e. ruminate that the money supply is increased to 1200. What is the forward-looking equilibrium level of interest rate and the unused equilibrium level of create for this economy given this change? What is the new equilibrium level of consumption? The new LM curve 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 initial information is accredited (no change in the money supply). If government purchases increase to 150, what is the change in railroad siding predicted by the Keynesian deal plot? What is the actual change in payoff 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 exit be less than this. To see this you quest 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 level of 1100 to the new level of 1200, or a change of 100 which is less than that predicted by the Keynesian Cross diagram.