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## Economics

 Basic Economics Macroeconomics Microeconomics Business Economics Econometrics International Economics Managerial Economics Game Theory Public Economics

Comparing long run effects of the monetary policy also fiscal policy.

Consider the economy of Hicksonia. The consumption function is given by

C= 200 + 0.75(Y-T)
The investment function is
I= 200 - 25r

Government purchases also taxes are both 100. The money demand function in Hicksonia is (M/P)= Y -100r

The money supply M is 1,000

a. Derive also graph also equation for the aggregate demand curve.

Hint : to do this , notice which from the money demand function also the effect which M= 1000 we have which ((1000)/P)=Y-100r
Solving for r we obtain
R=(Y/(10))=((10)/p)
Use this expression for r to express the investment equation as a function of constants Y an dP. Then use the equilibrium condition in the goods marketplace which
Y= C + I + G
This expression should give you an equation involving P also Y. solve this equation for P as a function of Y . This is the aggregate demand curve which we are looking for.

b. Suppose P=2. Consider an increase in the money supply M from 1,000 to 1,200. Illustrate what happens to this aggregate demand curve? Illustrate what happens to Y/

c. Repeat point (b) where now it is government purchases which increases from 100 to 150 while M=1,000. Illustrate what happens to Y?

d. Repeat point © but now suppose which the government finances the increase in government purchases with taxes also hence in the new equilibrium G= T= 150.

e. Compare the long run effects of the monetary policy in point© also the fiscal policy in point (d).

• Reference No.:- M916625

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