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1. Suppose that the following equations describe an economy (C, I, G, T, and Y are measured in billions of dollars and r is measured in percent)

435_value of the government purchase multiplier.png

a. Derive the equation for the IS curve

b. Derive the equation for the LM curve

c. Now express both the IS and LM equations in terms of r

d. Use the equations from Parts a and b to calculate the equilibrium levels of real output Y, the interest rate r, planned investment I, and consumption C.

e. At the equilibrium level of real output Y, calculate the value of the government budget surplus

f. Suppose that G increases by 36 to 386. Derive the new IS and LM equations

g. Using the information from Part f, calculate the new equilibrium levels of real output Y, the interest rate r, planned investment I, and consumption C.

2. Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases.

a. If investment does not depend on the interest rate, the IS curve is vertical.

b. If money demand does not depend on the interest rate, the LM curve is vertical

c. If money demand does not depend on income, the LM curve is horizontal

d. If money demand is extremely sensitive to the interest rate, the LM curve is horizontal.

Macroeconomics, Economics

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