Y = Cd + Id + G
Cd = 180 + 0.8(Y – T)
Id = 140 – 8r + 0.1Y
T = 400
G = 400
(Md/P) = 6Y – 120i MS = 6000 i = πe + r
Assume expected inflation πe = 0 and price level P = 1.
Since expected inflation is zero, i = r.
(Part 1)
In goods market equilibrium, Y = Cd + Id + G
Y = 180 + 0.8(Y - 400) + 140 – 8r + 0.1Y + 400
Y = 720 + 0.8Y - 320 - 8r + 0.1Y
(1 - 0.8 - 0.1)Y = 400 - 8r
0.1Y = 400 - 8r
Y = 4000 - 80r...........(IS equation)
(Part 2)
In money market equilibrium, (Md/P) = Ms/P
6Y - 120r = 6000/1
6Y = 6000 + 120r
Y = 1000 + 20r..........(LM equation)
(Part 3)
Setting IS = LM,
4000 - 80r = 1000 + 20r
100r = 3000
r = 30
Y = 1000 + 20 x 30 = 1000 + 600 = 1600
(Part 4)
When G = 440, (increase by 40), in new goods market equilibrium,
0.1Y = (400 - 8r) + 40
0.1Y = 440 - 8r
T = 4400 - 80r........(New IS equation)
Setting new IS = LM,
4400 - 80r = 1000 + 20r
100r = 3400
r = 34
Y = 1000 + 20 x 34 = 1000 + 680 = 1680
NOTE: As HOMEWORKLIB's Policy, 1st 4 parts are answered.
Suppose that the following equations describe an economy. Y = Cd + Id + G Cd...
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