Question

Carefully use the following information to answer below questions! Suppose you are given IS: Y 1250-50r and LM: Y 450+30r, a 2.5 M - 700 and P 2, M-(/3)Y+200-10r, nitial equilibrium Y-750, r-10 and . a) Evaluate numerically only the impact of fiscal policy on the income level Y) when government expenditure is increased by S5 billions, under the conditions when: i) Sensitivity of investment demand to the interest rate is 0.001 and 100. Less sensitivity of Investment to the interest rate causes fiscal policy more effective than more sensitive investment to the interest rate. ii) Sensitivity of money demand to the interest rate 0.001 and 100 government increases its purchases by 100 (i.e. AG-100). Answer mumerically b) Use the above model. How much of in and graphically. Also Check through dAD--> ΔΥ-ad△AD), what is crowded-out income (Y). c) Suppose the parameters k (k is the sensitivity of money demand to income) and a are 0.25 and 2.5, respectively. Assume there is an increase of $200 millions in government spending. By how much must the real money balances ) be increased to hold interest rates constant? Note: Calculate ΔΥ α (AG) then use k(AY) to find change in the real money demand via transaction demand for money kY, this change will require the same change in the real money balances to bring equilibrium in the money market d) Use the above model. What is the value of equilibrium income and investment when economy is observing liquidity trap situation? Note: Since, at liquidity trap the change in interest rate is zero that yields: Equilibrium income does change but it changes the IS curve to: Y = α (Ag -br)-and investment : l = (1-0 )-br-2

Answer 1