Consider the closed-economy model of the money market in which, the demand for real balances depends negatively on the nominal interest rate (i), and positively on disposable income (Y-T). That is, the money market is characterized by M = L(i.Y -T). Suppose tax revenues, T, are such that T T(Y), T'(Y) > 0, so that the goods market is characterized by Y = E{r,i-",G,T(). What is the effect of an increase in T on i for a given level of P? Derive an expression for this effect and state the requisite assumptions to support the sign of your answer.
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- Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y - T) I= 500-10r M b) P = 0.1Y - 35r G = 800 T = 200 1. 2. M Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. = 1000 P = 2 a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. c) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. What is…Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y-T) 500 - 10r I M P = = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. d) If the Central Bank intends to pursue monetary policy in order to restore output to the same level before the fall in consumer confidence, how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism e) Suppose that, the government intends to take an active role in restoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much should government spending change by? With the help of graphs, explain very carefully, the impact of this policy on the economy.Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8 (Y-T) I = 500 - 10r M P = 0.1Y35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whe her the actual level of spending matches the equilibrium level of output. c) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. 2. 1. What is…
- Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y – T) I = 500 10r M P = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate.Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y-T) I= 500-10r - M P 1. = = 0.1Y - 35r Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. 2. G = 800 T = 200 M = 1000 P = 2 b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. c) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. What is the immediate impact on income before the economy adjusts to its new equilibrium? What are the economy's equilibrium level of…Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y-T) I= 500-10r - M P = = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. d) If the Central Bank intends to pursue monetary policy in order to restore output to the same level before the fall in consumer confidence, how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism e) Suppose that, instead of relying on monetary…
- Assume that the consumption function is giv Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800.What is the numerical formula for the IS curve?What is the slope of the IS curve? What is the numerical formula for the LM curve? Calculate the equilibrium r and Y. Calculate the government spending multiplier. en by C = 200 + 0.5(Y – T) and the investmentfunction is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800.What is the numerical formula for the IS curve?What is the slope of the IS curve? What is the numerical formula for the LM curve? Calculate the equilibrium r and Y. Calculate the government spending…In class we assumed that money demand depends upon income, Md = L(Y, i). However, if people hold money as a medium of exchange it may be that money demand really should depend upon consumption, Md = L(C, i). In other words, if people consume more, they will also want to hold more money. Suppose that consumption, as usual, depends upon disposable income, C = C(Y – T). Money demand will then also, indirectly, depend upon disposable income, Md = L[C(y - T), i]. True or False: In this case, a tax cut will always increase in the short runConsider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?
- Assume that money demand in a given economy is represented with MD = 100Pe 2 -50i where i is the nominal interest rate expressed in decimal form. Moreover, assume that the real interest rate is equal to 0 and money is neutral. What is the seignorage maximizing level of the rate of growth of money? a) 2% b) 5% c) -3% d) None of the aboveSuppose that the Money Supply is currently at $13,000, and that Money Demand is given by: MD= 23,000 - 2,000r where r is the interest rate, and for the purposes of the functional form above, if the interest rate = 8%, the r = 8 for derterming MD. Suppose that we start in equilibrium in the money market and the Central Bank targets the interest rate. If the Central Bank raises the interest rate by 2%, then how large will the surplus in the Money Market be if the Central Bank does not adjust the Money Supply (MS)? Note: round your answer to two decimal places. Also, if the answer is $2,678 for example, input this as 2678.00Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) 1 = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 M = 2000 P = 2 Where Cis planned consumption, / is planned investment spending, Tis government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. Department of Economics a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output.