Question

The money market for this economy is described by the equations: (M/P) = 0.4Y - 40r M = 1200 P=1 12. Derive a formula for the LM curve, showing Y as a function of r. 13. What are the short run values of Y and ? 14. What are the short run values of Y and rif G increases by 200? What is the multiplier? Is the value different from what you calculated for question 9? Explain why it is different. 15. Derive a formula for the AD curve, showing Y as a function of P.

Answer 1

C=0.8 (Y-T) I=800 20M T=1000 Y=C+I+G Y=0.8(y-1000) + 800 - 204 + 1ooo Y = 0.8Y 800 t 800 20M t looo 0.2Y = 1000 2ou Y = 5ooo loor IS cwewe equation 10oot 200= 2oo So what will be the multipline and what will happen to GDP gouvenment expenditive multiplica a la = I-cact t = tax rate = C=0.8 Xa = O 0.8 "0.2 - Xu ДЧ I-ctct Au xa AY = (200) (5) AY - 1000 19=1200 - 1000 Au=200

Pepe No. Date So if gouvenment exfundiluce inaunan ley 200, ape must incluase ley 1000 multiple is 5 as 200 10) Taew = 1000 + 200 - 1200 So now Tincreases My -c ДТ 1-(tct AY AY 1-0.8 AY=-4 (200) LAT= 1200 AY = -800 AT= 200 -0.8 4 ДТ ДТ - 10oo So an increasi in T by 200, would lead to decrease in qDP ley 800 let us see what happens il 9 and I both incluant ley 200 Grow = 1200 Thew = ЛЧ AT= 200 Now 1200 200 (a + (-) log AT С So as Saw AY AX- 1000 su 1-1 ana ΔΥ ДТ Ot= -800 1-C So net So Heart will be 1000 - 800 - 200 will increase by 200

Page No. Date IS cueue ecreation is shown eveleve as Y = Sooo 100 u 12) (Ha = 0.4Y - you M = 1200 0.4Y - You P = 1 1200 1 0.4Y= 1200 t you Y = 3000 + 100M 1004 LM cwun i get IS and LM curve 5000 -100M = 3000 + 100M 2000 2oou M = 10.1.1 Y: 5000 -4ooo 100 C10 ) = 5000 - 1000 1 Y = 4000 then will have 14) If a increases la slight chango in the Is equation. We gue Y = ct Ita Y=0.8 (Y-1000) + 800 204 + 1200 Y = 0.81 - 800 + 800 204 + 1200 0.2 Y = 1200 204 Y = 6000 100 M ILM eqreation stays some So the new valuen are

Pege NO. Dete 6ooo - 100 m 200m M 3000 tloor 3000 15.1 Y = GOOO - 100 (15) = 6000-1500 = 4500 Ty=45oo 4000 500 AY= 4500 TAY=500 multiples Xu 1-(ACE is dlu to must note that the multipluie remains Same but the ansur fou change in GDP we is different from Quesa the reason the crowding out effed. Crowding out refers to decline in private investments when there is a change fiscal policy. The effect it has is on GOP! This cese of partial crowding out. the Y - 15 IS 5000 100 M 10or 5ooo - Y r (5000 - 42 100 Now let P = p* then 0.44-404 = 1200 z p*

Page No. Date substituling ② in ① un 0.4Y - 401 I (5ooo-Y) 100 1200 p* 1200 0.4Y yo so 0.01Y Р* 0.4Y 2000 t 0.4Y 1200 P* 0.8 Y = 1200 + 2000 Y = 1500 P + 2500 This is owy AD equation