Problem 3: IS-LM model An economy is initially described by the following equations: C=500+0.75(Y- T) I=1,000-50r МP-Y-200R G=1,000 T=1,000 м-6,000 P=2 a. Derive and graph the IS curve and the LM curve. Calculate the equilibrium interest rerate and income. Label that point A on your graph. b. Suppose a newly elected government cuts taxes by 20 percent. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? c. Now assume that the central bank adjusts the money supply to hold the interest rate constant. What is the new equilibrium income? What must the new money supply be? What is the tax multiplier? d. Now assume that the central bank adjusts the money supply to hold income constant. What is the new equilibrium interest rate? What must the money supply

Problem 3: IS-LM model An economy is initially described by the following equations: C=500+0.75(Y- T) I=1,000-50r МP-Y-200R G=1,000 T=1,000 м-6,000 P=2 a. Derive and graph the IS curve and the LM curve. Calculate the equilibrium interest rerate and income. Label that point A on your graph. b. Suppose a newly elected government cuts taxes by 20 percent. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? c. Now assume that the central bank adjusts the money supply to hold the interest rate constant. What is the new equilibrium income? What must the new money supply be? What is the tax multiplier? d. Now assume that the central bank adjusts the money supply to hold income constant. What is the new equilibrium interest rate? What must the money supply

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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