Suppose That the Following IS-LM Model Represents the ATA Economy

question 91

Essay

Suppose that the following IS-LM model represents the ATA economy.
Y = C^d + I^d + G
C^d = 180+0.7 (Y-T)
I^d = 100 - 18 r - 0.1 Y
T= 400
G= 400
M/P = L
L= 6Y - 120 i
M = 5400
Assume expected inflation is zero and P=1.
a. Find the equation for the IS curve.
b. Find the equation for the LM curve.
c. Find the equilibrium values for output and the interest rate.
d. At this equilibrium, what is the level of consumption and investment?
e. If government purchases (G) increases to $410, find the new equilibrium values for output and the interest rate.
f. What are the effects of the fiscal expansion above on consumption and investment?
g. Using the values in (e), find the new equilibrium values for output and the interest rate if the central bank of ATA increases the money supply to 5600.
h. What are the effects of the monetary expansion above on consumption and investment?
i. Comment on the effects of the two expansionary fiscal and monetary policies above on Y, i, C and I.

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Definitions:

Decompression Melting

A geologic process where melting occurs due to a decrease in pressure as rock rises closer to the surface, without a change in temperature.

Subducting Plate

The tectonic plate that is being pushed downward into the mantle beneath another plate at a convergent boundary.

Igneous Rocks

Rocks formed by the cooling and solidification of magma or lava.

Columnar Joints

Distinctive fracture-bounded columns of rock formed when hot but solid igneous rock contracts as it cools.