Assume That an Economy Is Described by the IS Curve $Y = 4,000$

question 125

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. 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? (Hint: Check $C + I + G = Y$ )
b. Now assume that the government wants to cut taxes to 1,000 . With $G$ set at 1,200 , what will the interest rate be at $Y = 4,000$ ? What must be the value of $M$ ? What will $I$ be? What will be the levels of private, public, and national saving? (Hint: Check $C + I + G = Y$ )
c. Which set of policies may be referred to as tight fiscal, loose money? Which set of policies may be referred to as loose fiscal, tight money? Which "policy mix" most encourages investment?

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Definitions:

Communism

A political and economic ideology advocating for a classless society in which all property and resources are communally owned, and each person works and is compensated according to their abilities and needs.

Measure Progress

The processes and methods used to assess the advancement or development of societies, economies, or individuals towards specific goals.

Body Count

The total number of killed, wounded, or missing individuals in a particular event, often used in the context of military conflicts or disasters.

Opponents

Opponents are individuals or groups that compete against or hold differing views from another in a conflict, competition, or debate.