Question

1. The following equations refer to the goods market of an economy in billons of S : C=500+0.8Yp; I=80; G=300 ; T=50 Answer the following questions: (a.) Solve for the goods market equilibrium. (5%) (b.) Find equilibrium disposable income (YD). (5%) (c.) Find equilibrium consumption (C).(5%) (d.) Calculate the private savings, public savings, and investment spending.(5%) (e.) Calculate the multiplier.(5%) 2. The following are the money demand and money supply functions in an economy M=8,000 : M-25000(0.4-i) Answer the following questions: (a.) Calculate the equilibrium interest rate. (5%) (b.) Suppose the central bank falls the equilibrium interest rate to 5%, will there be excess money supply or money demand? What monetary policy should be followed to reach the new equilibrium interest rate ? (5%) 3. The folliwng equations are related to the IS/LM model of an economy C = Co + Cya(Y-T): G = Go; T = To; [Y increases, I increases; i increases, Y decreases] M = SYL() (an increase in i decreases LD] Answer the following questions : (a) Suppose that I = 1(Y,I). Draw a diagram to show the effects of an increase in G on the equilibrium Y and i. Does this increase lead to an increase or a decrease in I? why? (15%) (b) Suppose that I = (Y). All other equations remain the same. Draw a diagram to show the effect of an increase in G on the equilibrium Y and i. Does this increase lead to an increase or a decrease in I? Why? (15%)

Answer 1

0 a C-500 +08YD I=80, G=00 To so goods Market en is when Y-AE Y= 500 +0.8(4-50) +80 4300 0.24 - soo-40+80+300 6) c) d) 4 = 840 4200 Yo=4-tar - 420050 = 4150 C= sooto:8 (4150) = 3820 Perivate saving = 40-C 400-3820 = 330 Public Savinj - Pax - a=30-300 = -250 e Muleplici = 1 EmPC - 70.8 0.25 Dann mazms 8000-25000/0.4-6) 6000=100oo-250001 - 2000 - 0.08 1000 - lege interest rate = 0.08=8% b) If i=5% then ma 25000 (0.4-0.05) - 8700 Cachs Money supply = 10000 -8750 = igno consacion any monetary poling or expansionary fiscal policy should be uses to reach the new equilibrium interest rate.