Reference no: EM132172218

Homework - Intermediate macroeconomics

Part A -

1. Suppose the economy is described by the following equations:

Y = C + I + G

C = 100 + .75(Y-T)

T = 100

G = 150

I = 125

a. What is the equilibrium level of income?

b. At the equilibrium level of income, is Government running a surplus or deficit?

c. Assume the full-employment level income is $1500. (i) How would you characterize this economy i.e. below or above full-employment? Suppose you are asked to recommend policies to improve the state of economy. (ii) What is the appropriate change in G? (iii) What will happen to government budget position is such a policy is enacted.

d. Instead of a change in government expenditure, a change in taxes could be advocated. (i)What is the appreciate change in taxes, and what will happen to government budget.

Part B -

Use the following model

Y = C + I + G

C = Co + b(Y-T)

I = Io + Iy - IrR

G = Go

T = To

Md = Lo - LrR + LyY

Ms = Mo

Where C₀ = Autonomous consumption

b= MPC,

Iy = income sensitivity of investment (Income elasticity of investment)

Ir = interest elasticity of investment

Lr = interest elasticity of money demand

Ly = income elasticity of money demad

I = investment, G= Government spending, T = Taxes

R = interest rate

Y = GDP

1. Derive IS equation for model

2. Find the slope of the IS curve

3. Find the intercept of the IS curve

4. Derive LM equation for this model

5. Find the slope of the LM curve

6. Find the intercept of the LM curve

If

Co =200

b =0.5

Io =150

Iy =0.25

Ir = 1,000

Go =100

To =100

Lo =200

Mo =340

Ly =0.2

Lr =1,000

1. Find IS curve equation.

2. Find LM curve equation.

3. Find equilibrium Y and R.