Question

3.) Use the following Macro Model to find an intial r (in the money market), Multplier (M) and new Y using the following values: initial Y=27,000 MS-27,500 eiI.100002 er=2 C- 1280 .mpc (or b)-0.75 I-870 i0.032 G-950 X-32 IMo-26 Y=C+I+G+(x-IM) C-Co+bY I-I,-ir G-Go X-X IM-IM, Ms = MD

Answer 1

Y = c + I + G + (x - IM) or, y = c_0 + I_0 - ix + G_0 + X_0 - IM_0 or, y (1 - b) = c_0 + I_0 + -ir + X_0 - IM_0 or, 25y = 1280 + 870 + 950 - 0.0326 or, y = 12424 - 0.1286 Now, in money market, M^D = 4y - and, M^5 = M^D Therefore e_1 y - e_2 r = 27500 or, 1, 100002 y - 2r = 27500 - 2 Now, initially y 27000 Therefore Eqn 2 can be written as, 2r = 1, 100002 times 27000 - 27500 or, 2r = 297000.054 - 27500 or 2r = 2200.054 r = 1100.027 Now, y (1 - b) = A^- - ir dy (1 ? 6) = -dr or, dr = -(1 - b/i)dy - 3 where, A^- = co + I_0 + G_0 X_0 - IM_0 = 3106 M = e_1 y - e_2 or, dM = e_1 dy - e_2 dr or, dr = e-1 dy - dM/e_2 equating 3 & 4, - (1 - b/i) dy = e_1/e_2 dy - 1/e_2 dm or, - (.25/0.032 + 1.100002/2) dy = -1/2dm or, dy/dm = 1/2 (7.8125 + 550001) = 1/(2 times 8.362501) = 1/16.725002 = 0.0598 . . (This is the