Question

Please give a detailed solution, thank you!

5. Given C 5000.75 (Y T) I = 2,000 -50r G 1,000 T 1,000 - 10Y - 2000r Ms 50,000 P a. Derive the IS curve and the LM curve, and find the equilibrium interest rate and output b. Government spending increases by 500. If the central bank does not react at all to this change, what is the new equilibrium output and interest rate? If instead the central bank wants to keep interest rates fixed, how should they react? What if they want to keep output fixed? Find equilibrium output and interest rates in each case C Return to the original numbers. The economy opens to the rest of the world. Assume = 10 CA NX 2000 50E Assuming perfect capital mobility, derive the IS, LM, and BP curves of the Mundell-Fleming model and find equilibrium income and the equilibrium real exchange rate. Depict on a graph with the real interest rate on the y-axis and output on the x-axis d. An import tariff changes the demand for NX to NX = 2500- increases net exports when exchange rates are fixed but not when they the intuition behind the result. Show each on a graph c. 50e. Show that the policy floating and explain are Design a policy that can increase net exports under floating exchange rates (there are many possible answers - show that your solution works by solving for the equilibrium NX) e.

Answer 1

(A) Y=C+I+G

Y= 500+0.75(Y-1000) + 2000-50r + 1000

0.25Y= 2750 - 50r (IS)

Md/P = Ms/P

10Y-2000r = 50000 (LM)

EQUATING IS AND LM, WE GET :

Y = 11000-200r

Y= 5000+200r

Y= 8000

r= 15%

(B) Now govt spending is 1500

therefore,

Y= 500+0.75(Y-1000) + 2000-50r + 1500

Y= 13000-200r (is)

Y= 5000+200r (lm)

Y= 9000

r= 20%

if they want to keep the interest rate fixed increase money supply, shift lm curve to the right

y= 5000+ 200r

put 15% r value and you get change in Y= 5030, Y= 13030

similarily if you want to keep the output fixed

earlier Y= 8000

8000-5000= 200r

CHANGE IN r= 15%

r= 15+15= 30%