ECONOMICS 3012
PROBLEM SET # 5
J. ALLEN
I.
IS & LM TOGETHER :
Given:
A.
B.
C.
D.
II.
SPRING 2006
M d = .2Y - 10i
P = 1.00
α = 2.0
G = 300
Yn = 2150
M = 300
A = 1250
I = 400 - 25i
Find the IS curve, the LM curve, and the initial equilibrium Y0 , i0 and I0 .
M1 decreases to 250 . Find new Y1 , i1 and I1 . Describe ‘action’, ‘reaction’, and ‘feedback’.
From the original equilibrium of Question A.above, ie., M = 300, G increases by 50 .
1.
Find new Y2 , i2 and I2 . Describe ‘action’, ‘reaction’, and ‘feed-back’
2.
How much private investment was "crowded out"?
3.
If the government wanted to maintain the interest rate constant at i0 (from A.
above) as it increased G , at what value would it ask the Bank of Canada to set
M ?
If the government wanted Y to = Yn and i to = 8, what G and M would it have to set?
AD CURVE ALONE :
From the initial information of I. above:
1.
Find the AD curve as Y = # + # (1/P). What are the numerical values of γ and β ?
2.
P = 1.0 . Find Y0 , i0 and I0 .
3.
P rises to 1.25. Find new M/P . Find new Y1 , i1 and I1 .
4.
P falls to 0.83333. Find new M/P (Round to a whole number.) Find new Y2 , i2
and I2 .
5.
Your answers to 2., 3. and 4. above give three points on the AD curve. Sketch out a
graph of the AD curve in the P,Y space, labelling the three points.
6.
M rises to 330. Find the new AD curve. On your sketch of the AD curve from 5.
above, draw in the point on the new AD curve at P = 1.0 .
7.
M = 300. G falls to 250, so A = 1200 . Find the new AD curve. On your sketch of
the AD curve from 5. above, draw in the point on the new AD curve at P = 1.0 .