Assume the Following Model of the Economy, with the Price

question 32

Essay

Assume the following model of the economy, with the price level fixed at 1.0:
C = 0.8(Y - T) T = 1,000
I = 800 - 20r G = 1,000
Y = C + I + G Ms/P = Md/P = 0.4Y - 40r
Ms = 1,200
a. Write a numerical formula for the IS curve, showing Y as a function of r alone. (Hint: Substitute out C, I,
G, and T.)
b. Write a numerical formula for the LM curve, showing Y as a function of r alone. (Hint: Substitute out M/P.) c. What are the short-run equilibrium values of Y, r, Y - T, C, I, private saving, public saving, and national saving? Check by ensuring that C + I + G = Y and national saving equals I.
d. Assume that G increases by 200. By how much will Y increase in short-run equilibrium? What is the
government-purchases multiplier (the change in Y divided by the change in G)?
e. Assume that G is back at its original level of 1,000, but Ms (the money supply) increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for money supply (the change in Y divided by the change in Ms)?

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