An economy is described by the following equations: Desired consumption cd=130 +0.5(Y-T)-500r Id=100-500r Desired investment Government purchases G = 100 Taxes T = 100 Real money demand Money supply L = 0.5Y - 1000r M = 1320 Full-employment output Y = 500 Assume that expected inflation is zero so that money demand depends directly on the real interest rate. Also assume the SRAS is horizontal at the current price level. a. Write the equations for the IS and LM curves. (These equations express the relationship between r and Y when the goods' and asset mar- kets are in equilibrium.) b. Calculate the full-employment values of output, the real interest rate, the price level, consumption, and investment.

An economy is described by the following equations: Desired consumption cd=130 +0.5(Y-T)-500r Id=100-500r Desired investment Government purchases G = 100 Taxes T = 100 Real money demand Money supply L = 0.5Y - 1000r M = 1320 Full-employment output Y = 500 Assume that expected inflation is zero so that money demand depends directly on the real interest rate. Also assume the SRAS is horizontal at the current price level. a. Write the equations for the IS and LM curves. (These equations express the relationship between r and Y when the goods' and asset mar- kets are in equilibrium.) b. Calculate the full-employment values of output, the real interest rate, the price level, consumption, and investment.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter34: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 4CQQ

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