ECONOMICS 4012
Problem 2
I.
Solve for , , and , in symbols; ie in terms of the simple parameters: a, b, c, d, f, and h.
[Note: In each case below where it is appropriate, draw a crude graph, labelling the relevant points
with numbers on each axis.]
II.
IS curve only
Given:
C = 340 + .6 (Y-T)
I = 300 – 2000 i
A.
B.
C.
D.
E.
III.
T = 400
G = 400
What is the numerical value of ?
Write out the IS curve as numbers, Y and i.
If i = .10, find equilibrium I and Y.
If i = .05, find equilibrium I and Y.
G changes to 500. Write the new IS curve. If i = .10, find new equilibrium Y.
LM curve only
Given
Md = .1 Y – 500 i
A.
B.
C.
D.
E.
IV.
Ms = 100
P = 1.00
Write out the LM curve as numbers, i and Y.
If Y = 1600, find equilbrium i.
If Y = 1500, find equilibrium i.
Ms changes to 120. Write the new LM curve. If Y = 1500, find new equilibrium i.
P now changes to 1.10. Write the new LM curve. If Y = 1500, find new equil i.
Simultaneous solutions and AD curve
Given all that’s in II. and III. above, with:
G back to 400
A.
B.
C.
D.
E.
F.
V.
Ms back to 100
P back to 1.0
What are the equilibrium values of Y, i, and I?
What are the numerical values of  and ?
Write out the AD curve as numbers, Y and P.
If P = 1.00, find equilibrium Y, i, and I.
If P = 1.25, find new equilibrium Y, i, and I.
If P = 0.80, find new equilibrium Y, i, and I.
AD and LAS; Early dynamic macroeconomics
Start with your AD curve of IV. C above. This is now AD0 . In addition, you are given:
P0 = 1.0
Y* = 1500.
A. G changes to 500.
Find the new AD curve, AD1 , and the values of Y1 , P2 , Ms1 , i1 , and I1 .
B. From the position of A above, M changes to 120.
Find the new AD curve, AD2 , and the values of Y2 , P2 , Ms2 , i2 , and I2 .
C. The government now instructs the Bank of Canada to set M3 such that i3 is equal to i0 –
that is, i3 becomes .10. What is M3 ? What are the values of Y3 , P3 , Ms3 , i3 , If this
policy – called “accommodation” – continues, what will happen?