Question

Compute the new equilibrium values of * * Y i ' and ' .

Consider the following IS-LM model of a closed macroeconomy The Goods Market (1)Components of planned aggregate expenditure (2) Consumption function (3) (4) Government expenditure (5) Disposable income (6)Tax function (7) Goods market equilibrium 1=bo +by-b21 G=G Y,Y-T Planned investment The Money Market し=do +d,Y-d,i (8) (9) (10) Money demand Money supply Money market equilibrium MIP-MIP All of the variables here are as listed in the notes, with exogenous variables G>0 M, and P, and parameters co >0, c E (0,1), t e[0,1], b, >0, b, >0, b, >0, d, >0, d >0, and d,>0 (10 marks) Suppose, now, that the economy in the above model enters the global financial crisis, and experiences significant drops in c, and à, along with an increase in do. Their new values become: c-80, b,'-8, and do'-110 nancial crisis, and experiences S1 a) Compute the new equilibrium values of Y' and i'. b) strate the effects of this change on an IS-LM diagram, and explain the effects, very briefly.

Answer 1

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