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A) Consider the following short-run closed economy IS-LM model described by equations (1) through (6): (1) C = 100 + 0.75(Y - T); (2) T = 600;(3) G = 500; (4) I = 800 - 20 r ; (5) Y = C + I + G ; (6) M/P = 0.5Y - 50r where the nominal money supply M=1180 and the price level is P = 1. Equation (5) is the goods market equilibrium condition (IS equation), while equation (6) is the money market equilibrium condition (LM equation). Solving for the equilibrium values of Y* and r* yields:
B) Consider the following short-run closed economy IS-LM model described by equations (1) through (6): (1) C = 100 + 0.75(Y - T); (2) T = 600;(3) G = 500; (4) I = 800 - 20 r ; (5) Y = C + I + G ; (6) M/P = 0.5Y - 50r where the nominal money supply M=1180 and the price level is P = 1. Equation (5) is the goods market equilibrium condition (IS equation), while equation (6) is the money market equilibrium condition (LM equation). Suppose that government expenditures increase by 100 units but that the Bank of Canada uses monetary policy to maintain the interest rate constant. Then this increase in government spending will cause
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