Assume That an Economy Is Described by the IS Curve

question 38

Essay

Assume that an economy is described by the IS curve Y = 3,600 + 3G - 2T - 150r and the LM curve Y = 2 M / P + 100r [or r = 0.01Y - 0.02 (M / P)]. The investment function for this economy is 1,000 - 50r. The consumption function is C = 200 + (2 / 3)(Y - T). Long-run equilibrium output for this economy is 4,000. The price level is 1.0.
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a.Assume that government spending is fixed at 1,200. The government wants to achieve a level of investment equal to 900 and also achieve Y = 4,000. What level of r is needed for I = 900? What levels of T and M must be set to achieve the two goals? What will be the levels of private saving, public saving, and national saving?

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Definitions:

Cost Of Goods Sold

The direct costs related to the production of the goods sold by a company, including materials and labor.

Direct Materials

Costs of raw materials that are directly used in the production of a product, easily traceable to the product being manufactured.

Direct Labor

The labor costs directly associated with the production of goods or services, including wages of workers directly involved in production.

Manufacturing Overhead

All manufacturing costs that are not directly related to the production of a product, including indirect materials, labor, and other expenses.