Lesson 1: Commodity and money markets are represented by the following parameters (Unit Consumption: C = 60 + 0.75Yd
Export: X = 140
Investment: I= 100 + 0.05Y – 50i
Import: IM = 0.15Y
Tax: T = 0.2Y
Actual money supply: MS = 500
Government spending: G = 250
Actual demand for money: MD = 400 + 0, 2Y -100i
a) Write an equation to represent the IS, LM curves, Determine the equilibrium level of income and interest rate.
b) Assume government spending increases by $30 million. Determine the equilibrium level of income and interest rate. Determine the investment retracement level with this policy.
c) Assuming government spending remains the same but the Central Bank increases the money supply by $30 million, how will the equilibrium output and interest rate change?
d) State the comments drawn from the results of points 2 and 3.
e) Now that the government uses both solutions in questions 2 and 3 at the same time, what is the equilibrium level of output and interest rate? How will this affect the economy in the short and long term?
f) Illustrate the results on a graph.