1. Consider a simple Keynesian income-spending model of an economy described by the following equations
C = 210 + 0.75Yd
= 300
= 425
= 120
= 100
M = 0.15Y
= 250
(a) Calculate the equilibrium level of income.
(b) Sketch this equilibrium position using a two-dimensional graph.
(c) Suppose the government reduces public expenditure on goods and services by 25. Estimate the change in the equilibrium level of income. What is the new equilibrium level of income?
[All calculations to one decimal point]
2. Consider an IS/LM model of an economy with the following equations:
C = 300 + 0.6Yd
I = 100 – 5i
= 200
= 100
T = 0.2Y
L = 0.5Y – 30i
/ = 500
(a) Using the above data, derive the equation for the IS schedule.
(b) In this example, what is the equation for the LM schedule?
(c) Calculate the equilibrium level of income and interest rates. Sketch the IS/LM equilibrium position.
(d) What is the value of the monetary policy multiplier with respect to income and interest rates? If the money supply is increased by 100, what are the new market-clearing income and interest rate levels?
[All calculations to two decimal points]
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