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:

PTH

Parathyroid hormone, a regulatory substance produced by the parathyroid glands that is critical in maintaining calcium balance in the blood.

Insulin

Insulin is a hormone produced by the pancreas that regulates blood sugar levels by facilitating the uptake of glucose by cells.

ADH

Antidiuretic Hormone (ADH) is a peptide hormone that regulates the amount of water absorbed by the kidneys to maintain bodily fluid balance.

Ovary

A female reproductive organ in which ova (eggs) are produced, along with the hormones estrogen and progesterone.