Please kindly answer the following question ONLY (i) Consider the following econ
ID: 1190970 • Letter: P
Question
Please kindly answer the following question ONLY (i)
Consider the following economy
C = Ca + 0.80 (Y – T) Ca = 400 – 10 R T = 750 + 0.2 Y (M/P)d = 0.25 Y – 25 R
(MS/P) = 2000/P. This means that Ms = 2000. Ip = 1800 – 30 R G = 2000 NX = 700 – 0.04 Y
A) Clearly define and compute the multiplier for this economy.
B) Clearly define and derive the equation of the autonomous spending Ap and the IS curves.
C) Clearly define and derive the equation of the LM curve as function of r and P. [Hint: equalize the demand and supply for money (MS/P) = ( M/P)d
D) Find the equilibrium interest rate equation for YIS = YLM. This should be a function of P.
E) Derive the equation of the aggregate demand curve AD. [Hint: Replace the equilibrium interest rate in either the IS or LM function. This should give you the AD curve in the form:
YAD= Constant + Constant/P.
F)Now consider the following aggregate supply curve YAS = 9000 - 20 W + 1000 P. For W = 31.25, derive the aggregate supply YAs.
G) Find the equilibrium levels of price and output for which YAD=YAS.
H) Graph the estimate of the AD and the AS curves clearly showing the equilibrium point indicating the price on the vertical axis and the output on the horizontal axis.
I) Based on the last graph, please give an example and the impact of the following policy decisions or events on a separate graph. Use arrows to clearly show how the respective curve (s) shifts in each case. Indicate and describe the resulting equilibrium point:
Expansionary fiscal policy, Contractionary monetary policy, Increase in real wage rate in the labor market, Simultaneous decrease in the real wage rate and increase in the real money supply.
Explanation / Answer
a)
Y = C + Ip + G + NX
Y = 400 -10R + 0.8(Y - 750 - 0.2Y) + 1800 - 30R + 2000 + 700 - 0.04Y
Y - 0.64Y - 0.04Y = (400-600+1800+2700) - 40R
0.32Y = 4300 - 40R
If G increases by delta(G) then Y will increase by 1/0.32 = 3.125. Multiplier = 3.125
b)
IS curve equation, Y = C + Ip + G + NX
Y = 400 -10R + 0.8(Y - 750 - 0.2Y) + 1800 - 30R + 2000 + 700 - 0.04Y
Y - 0.64Y - 0.04Y = (400-600+1800+2700) - 40R
0.32Y = 4300 - 40R
Y = 13437.5 - 125R
c)
LM CURVE, (M/P)d = Ms/P
0.25Y - 25R = 2000/P
0.1Y-R = 80/P => Y=10R + 800/P
d)
n equilibrium, YIS = YLM
13437.5 - 125R = 800/P + 10R
(13437.5 - 800/P)/135 = R
99.53 - 5.9/P = R
e) Putting R in IS equation:
Y = 13437.5 - 125(99.53 - 5.9/P)
= 996.25 + 5.9/P --- This is AD equation
f) YAS = 9000 - 20 W + 1000 P
when w = 31.25
YAS = 8375 +1000P
G) AD = AS
996.25 + 5.9/P =8375 +1000P
7378.75P = (-5.9)+1000P2
P=7.37 -----This is equilibrium price
Equilibrium quantity: Y = 8375 + 1000(7.37) = 15745