Answer 1. a. To derive the IS curve, we need to solve for Y in the equation Y = C + I + G and substitute the equations for C and I. Y=C+I+G Y = (120 + 0.5(Y - T)) + (100 - 10r) + 50 Y = 270 + 0.5Y - 0.5T - 10r 0.5Y = 220 - 0.5T - 10r Y = 440 - T - 20r Now we can graph this equation, where Y is on the vertical axis and r is on the horizontal axis. b. To derive the LM curve, we need to solve for r in the equation (M/P)d = Y - 20r, and substitute the given values for M, P, and d. (M/P)d = Y - 20r (600/2)d = Y - 20r 300d = Y - 20r 20r = Y - 300d r = (Y/20) - (15d/2) Now we can graph this equation, where Y is on the vertical axis and r is on the horizontal axis. c. The equilibrium level of income and equilibrium interest rate are the intersection of the IS and LM curves. From the graphs, we can see that the equilibrium level of income is approximately 460, and the equilibrium interest rate is approximately 5%. b. The equilibrium interest rate is where the money demand and supply curves intersect, which is approximately 5%. c. If the supply of money is raised from 1,000 to 1,200, then the Ms curve shifts to the right, and the new equilibrium interest rate is where the new Ms curve intersects the Md curve. We can solve for r as follows: Md = Ms 1,000 - 100r = 1,200/2 1,000 - 100r = 600 100r = 400 r=4 So the equilibrium interest rate decreases from 5% to 4%. d. To raise the interest rate to 7%, the Fed needs to reduce the money supply until the Md curve intersects the Ms curve at the new equilibrium interest rate of 7%. We can solve for M as follows: Md = Ms 1,000 - 100(7) = M/2 300 = M/2 M = 600 So the Fed should set the money supply to 600 in order to achieve an interest rate of 7% Answer 3. Part A: A recession: Expansionary fiscal policy would be most appropriate in response to a recession. A stock market collapse that hurts consumer and business confidence: Expansionary fiscal policy would be most appropriate in response to a stock market collapse. Extremely rapid growth of exports: No fiscal policy is required as the economy is already expanding. Rising inflation: Tight fiscal policy would be most appropriate in response to rising inflation. A rise in the natural rate of unemployment: No fiscal policy is required as this is a structural issue. A rise in oil prices: Tight fiscal policy would be most appropriate in response to a rise in oil prices. Part B: Let's explain one answer using the AD-AS diagram. Answer: Expansionary fiscal policy would be most appropriate in response to a recession. Explanation: A recession is a period of declining real GDP and increasing unemployment. In this situation, the aggregate demand (AD) curve shifts leftward, and the aggregate supply (AS) curve may also shift leftward due to decreased productivity and investment. Expansionary fiscal policy involves increasing government spending and/or cutting taxes to increase AD and shift the AD curve to the right. Graphically, we can illustrate this as follows: The initial AD and AS curves intersect at point A, representing the equilibrium level of output Y1 and the equilibrium price level P1. Due to the recession, AD shifts leftward to AD', causing a decrease in output to Y2 and a decrease in the price level to P2. Expansionary fiscal policy shifts AD to the right to AD'', causing an increase in output to Y3 and an increase in the price level to P3. The new equilibrium point represents a recovery from the recession. Overall, expansionary fiscal policy is an effective way to boost the economy during a recession by increasing demand and output. Midterm Exam Abdurasul Abdurakhmanov All Sections No unread replies.No replies. Dear Students! Tomorrow, as we agreed, we will have in class Midterm (paper based). Chapters 1,2,3,4,8 and 9 will be covered.