The consumption function of an economy is given byc , Ask an Expert

Economics

The consumption function of an economy is given by

c = 200+0.75(y-t)

And the investment function by

I = 200 = - 25r.

Government purchases G and taxes Τ are both 100. The money demand function is given by

(M/P)D = y - 100r

The money supply Μ is 1,000 and the price level P is 2.

(a) Calculate the equilibrium interest rate r and the equilibrium level of income Y.

(b) Suppose that government spending is raised to 150. What are the new equilibrium interest rate and the new equilibrium income? By how much does the IS curve shift?

(c) Suppose that instead the money supply is raised from 1,000 to 1,200. What are the new equilibrium interest rate and the new equilibrium income? By how much does the LM curve shift?

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9528856

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