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%)

Q1toQ3

Answer 1

0 a C-500 +08YD I=80, G=300 T = 5o goods Market ene is when Y-AE Y= soo +0.8(4-50) +80*300 0.24-500-40+80 + 300 = 840 4200 6) c) & Yo-4-tar = 4000 50 = 4150 - 500+ 0.8 (4150) = 3820 Peinate saving = 40-C - 400-38 20 = 330 Public Saving - Pax - a= 30-300 = -250 That specay = 80 muliplier = 1 e Y-MPC 1018 -