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The following equations describe an economy. Y=C+I+G C=50+0.75(Y-T) I=150-10r, (M/P)d=Y-50r, G=250, T=200 M=3000, P=4 a. Identify each of the variables and briefly explain their meaning.(5 Marks) Meaning of the variables Y = gives the value of all goods and services produced in an economy which is also referred to as the Gross Domestic product (GDP). C = represents the consumption function. Consumption is a function of disposable income which is obtained by subtracting tax from income level (Y-T). I = is the investment function. It is a function of interest rate. Investments are negatively related to interest rate. An increase in interest rates makes borrowing expensive and thereby slows down investment. G = is the government expenditure or the government spending. (M/P)d = is the money demand. It's a function of interest rates. Ms = is the money supply P = is the price level. b. From the above list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph.(5 Marks) IS curve The IS curve represents the product market. It given by the equation; Y=C+I+G Y=50+0.7(Y-T) + 150-10r + 250 But T=200 Y=50+0.7(Y-200) + 150-10r + 250 Y=50+0.7Y-140 + 150-10r + 250 0.3Y=310-10r Y=1033.33 - 33.33r IS curve: Y=1033.33 - 33.33r This study source was downloaded by 100000813451415 from CourseHero.com on 06-28-2022 06:01:42 GMT -05:00 https://www.coursehero.com/file/90126746/The-following-equations-describe-an-economydocx/ c. From the above list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b).(5 Marks) LM curve (M/P)d=Y-50r Ms=3000 P=4 (M/P)d=(M/P)s=M/P 3000/4= Y-50r 750= Y-50r Y=750+50r LM curve: Y=750+50r d. What are the equilibrium level of income and the equilibrium interest rate? For any (5 Marks) Equilibrium level of income and interest rate IS curve: Y=1033.33 - 33.33r LM curve: Y=750+50r Equating the two equations; 1033.33 - 33.33r =750+50r 83.33r=283.33 r=3.4 Y=750+50*3.4=920 This study source was downloaded by 100000813451415 from CourseHero.com on 06-28-2022 06:01:42 GMT -05:00 https://www.coursehero.com/file/90126746/The-following-equations-describe-an-economydocx/ Powered by TCPDF (www.tcpdf.org)