Assume an economy were characterized by the following equations C = C + bYD I= Ï - di G=G T= T X=X IM= Z + fY MD= a + Bi + yY MS= P = 1 (1) (2) (3) (4) (7) (8) (9) where the notation denoting parameters YD denotes disposable income. We assume that 0

Microeconomic Theory
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Chapter2: Mathematics For Microeconomics
Section: Chapter Questions
Problem 2.6P
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Assume an economy were characterized by the following equations
C = C + bYD
I=Ī - di
G=G
T=T
X=X
IM= Z +fY
MD= a + Bi+yY
MS=Ⓒ
P = 1
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
where the notation denoting parameters C,b,1,d,e,G,T,X,Z,f,a, ß,y, are all positive and
YD denotes disposable income. We assume that 0 <b+e<1 and f<b.
(a) Find the equations of the IS and LM curves.
(b) If government spending increases by 1, how much does the IS curve shift?
What is the intuition?
(c) Find the short-run equilibrium output level and interest rate.
(d) If government spending increases by 1, how much does the Ye increases? Compare this
to the one in (b).
Transcribed Image Text:Assume an economy were characterized by the following equations C = C + bYD I=Ī - di G=G T=T X=X IM= Z +fY MD= a + Bi+yY MS=Ⓒ P = 1 (1) (2) (3) (4) (5) (6) (7) (8) (9) where the notation denoting parameters C,b,1,d,e,G,T,X,Z,f,a, ß,y, are all positive and YD denotes disposable income. We assume that 0 <b+e<1 and f<b. (a) Find the equations of the IS and LM curves. (b) If government spending increases by 1, how much does the IS curve shift? What is the intuition? (c) Find the short-run equilibrium output level and interest rate. (d) If government spending increases by 1, how much does the Ye increases? Compare this to the one in (b).
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