Question

the first part i need it in calculation please. and please explaon as I have the exam tomorrow.

cite Policies and shocks In IS/LM Expenditure CCY.+) + (7.0) +G+ NX C-20 +0.8xY(1 -0.35) 1 - 40 +0.15Y -3001 tirates McYxI ng 0.02 60 and NX0. ney in the economy is 625. The price level is Ps2.5, G The amount of nominal money in the economy is 625 Currently, the equilibrium interest rate is - 2.7, the output is Y 339. (a) The economy experiences a shock: improved expectations change consumpo C = 20 +0.9 x Y(1 -0.35) Show how the markets respond to improved expectations in absence of policy. To three ways: calculate new values of key macroeconomic variables, graph comparam after), or describe the sequence of events mproved expectations change consumption rule to ctations in absence of policy. You can do it in either of omic variables, graph comparative statics (before and (6) Suggest a fiscal policy in response to improved expectations. Similarly to (a), you can show its effect in one of the three ways. (c) Suggest a monetary policy in response to improved expectations. Similarly to (a), show its effect in one of the three ways.

Answer 1

The answered is requested for 2 part (a) only

The solution is as follows:

At equilibrium:

Y=C+I+G+NX

Y=20+0.9Y(1-0.35)+40+0.15Y-300i+60+0

Y=20 + 0.585Y + 40 + 0.15Y - 300i + 60

Y=20+40+60 + 0.585Y+0.15Y - 300i

Y=120 +0.735Y - 300i

0.265Y = 120 - 300i

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M=625 ; P = 2.5

That means, (625/2.5)=0.02Y/i

250i = 0.02Y

Y=12500i

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0.265*(12500)i = 120-300i

3312.5i = 120 - 300i

3612.5i = 120

i = 0.0332179931

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Thus,

i=3.32%

Y = 12500*0.0332179931 = 415.224

Thus, interest rate increase from 2.7% to 3.32% and equilibrium income increased from 339 to 415.224