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- 1. [IS-LM Model - II] Let the IS equation be given as Y = then A 1-b where 1-b is the marginal propensity to save, g is the investment sensitivity to the interest rate i, and A is an aggregate of exogenous variables. Let the LM equation be Y 9 1-b T Mo 1 +-1, k where k and I are income and interest sensitivity of money demand, respectively and Mo is is the real money balances. If b = 0.7, g = 100, A = 252, k = 0.25,7 = 200, and Mo = 176, (a) Write the IS-LM system in matrix form. (b) Solve for Y and i by matrix inversion. Recall the formula for matrix inversion in the 2 x 2 case discussed in class. (c) Solve for Y and i by Cramer's rule.US $ HK$ 0.15 0.10 Qpeg Q" Queg Supply HK$ Currency peg Demand HK$ Quantity of HK$ for US$ Above is the FX market for Hong Kong dollars (HK$) relative to US dollars (US$), where the HK$ is pegged to the US$. If the HK Central Bank abandons the peg, what would happen? O The HK$ will depreciate against other currencies except for the US$. O The US$ will depreciate against the HK$. O The HK$ will depreciate against the US$. O The HK$ will appreciate against other currencies except for the US$. O Both the US$ and the HK$ will appreciate against all oth currencies.Consider an economy with a constant nominal money supply, a constant level of real outout Y= 400, and a constant real interest rate r 10%. Suppose that the income elasticity of money demand is 1.20 and the interest elasticity of money demand is-0.10. a. By what percentage does the equilibrium price level differ from its initial value if output increases to Y 480.00 (and rremaine at 10%)? %AP= (enter your result as a percentage rounded to two decimal places). b. By what percentage does the equilibrium price level differ from its initial value if the real interest increases to r-12.50% (and Y remaina at 400)? %AP (enter your result as a percentage rounded to two decimal placea). c. Suppose that the real interest rate inoreases to re 12.50%. By what percentage would real output have to increase for the equilibrium price level to remain at its initial value? %AY- T(enter your reault an a percentage rounded to two decimal places)
- 4. Consider the following IS-LM model: Consumption:C = 200 + .25YD Investment : I = 150 + .25Y -1000i Taxes : T = 200 Government Expenditures : G = 250 Demand for Real Money Balances : (M/P)d = 2Y -8000i Money Supply : M/P = 1600 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) 9-C-1+G Y= 200 0.25 (Y-200) + 150 0.25 4-1000(1) +250+ Y- 200 0.254-50+1500. 25Y- 1000i+250G 93D550-1000 b. Derive the LM relation. (Hint: Write this equation with i on the left side and everything else on the right.)Assume that the demand for real money balance (M/P) is M/P = 0.6Y-100i, where Y is national income and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?Consider the following short-run IS-LM model with income taxation. The economy is described by equations (1) through (6): (1) C= 500 +0.75(Y - T) (2) T = 800 (3) G = 550 (4) 1 700 30 r (5) Y=C+I+G (6) M/P = 0.6Y60r where the nominal money supply M-1200 and the price level is P = 2. Then, in the short run, the equilibrium output for the economy is given by (approximately): 24.14 Y*=2636.80 Y*=2245.00 Y*=1900.00 h
- 3. What impact will budget deficits have on the exchange rate value of the dollar? How will this impact net exports and aggregate demand? Explain1. IS-LM-AD Suppose the economy of Canada is governed by the following consumption function, investment function, and fixed values of government expenditure and taxes C =300 +0.6(Y-T), I =700- 80r, G =500, T =500. Further, suppose that the money demand function, money supply, and price level are given by =Y- 200r, М - 3000, P 2. (a) Compute the IS and LM curves, and plot these curves for interest rates ranging from 0% to 15%. Find the equilibrium levels of Y and r. (b) Suppose that the government increases expenditures to G = 700. What are the new equilibrium values of Y and r. What is the government expenditure multiplier? 500), compute the aggregate (c) For the initial levels of government expenditure (G demand curve. What is the level of aggregate demand when the price level is equal to 4? (d) Now consider the case where G increases to 700. What is the new level of aggregate demand when holding the price level equals 4? 1 (e) Suppose that investment is now more sensitive to…"that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money" do you agree or disagree with this statement? provide two reasons why?
- 25.Foraign exchange dealers expect the Canadian dollar next year to depreciate against all currencies. What is the effect on the quantity of real GDP demanded or aggregate demand in Canada? A. There is no change to either the quantity of real GDP demanded or to aggregate demand. В. Canadian aggregate demand increases. С. Canadian aggregate demand decreases. D. The quantity of Canadian real GDP demanded decreases. E. The quantity of Canadian real GDP demanded increases.Let the IS equation be A 9 -b 1-b Y = where 1-b is the marginal propensity to save, g is the investment sensitivity to inter- est rates, and A is an aggregate of exogenous variables. Let the LM equation be Mo 1 k 1- + i k where k and I are income and interest sensitivity of money demand, respectively, and Mo is real money balances. If b=0.7, g=100, A = 252, k = 0.25, = 200, and M = 176, then (a) Write the IS-LM system in matrix form.10) Initially, an economy is in long-run equilibrium with a real GDP of $4 trillion. Suppose that the productive capacity of the economy increases by 50% and at the same time, the money supply increases at the same rate. 1.) Using the line drawing tool (possibly twice), show the effect on the economy. Properly label your new line. 2.) Using the point drawing tool, show the new equilibrium price level and output. Label the point E2. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
