Chapter . Chapter 12 – Problem 3

Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Question

Consider the economy of Wiknam.

The consumption function is given by

C = 200 + 0.75(Y – T).

The investment function is

I = 200 – 25r.

b2pMw2C0Xrl9dyUtvHjuIZC5ZL4dExNVLuXRAxvftP+wtWuBFSaQz+6lLaLhFbQswsjiBFXYO5TTinQfUKk+4w7S7qP9FSXkOkuSqYw5/5efxD85PT2LopBrRqdrjwyAAD2PsePmYRKzwmg+OJ0exK0SlE+OeHQZY+MPVcLZ7wztm4PvtjSYV9+KnalhgmFdiMbV6hUeOF1EYwFUX/aSs7EJtOqeBND1utX5bp56jnGFqqDu6lNhFQYMu4NONMr5UpGvoXIZ9rGJMWQpqCt8kEq1nlZjd3w9oR7NVH5RJL9qA2i05VnKsUn8KcpKc6Bxjtz8bjhuOkNY7ENO3ggrL6hSbSALjoTc8ZZYdBxBXi5ylXj24lJx6j1G7HsPbEGBRYAC24cV6Hjv6WRP9ZLsDoDj7pasLa+KitfSQOr2bT9joePFn7qqvH7/F2Xo6KDVzkB70dbIRVrapV1K/Gygh1HGjqnZ9+UTVngWxz1Wq9Ehxm8pSJ0Wts8WNZmMl2riwiVo5HpTmNJA2bPdtopHZl+lf7k44r/ZWK6RGA7LCOtWb6MDkLphSuuhrEZoncgz799STcICb/pmaK4iFSgy60SkJJQEuCrZIlYz6BWxBve26DrfccyG5rQHE6667nwr6FdbUNavaEnvpcnyziP5uQqiMDlZJni28+RAI63+C04w8EHSkZ+0uL09lXHPROfTebQi28vlMzDeIH2DntywDFsRLnOMhucYKUYPIwmuLWyq7J0OgtAwmkAVhhIsvgI5Im5Vgw==
Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.

Question

The money demand function in Wiknam is

(M/P)d = Y – 100r.

EKiCVvaedeJvGtEy7tWAAv+gMN9nYmzGqdwQCYiK2CPiveaOcXmXSlYhwG7p2zbQl+pfNRuDE+baHnxEo1xDBNe9llvGQVG2H9i0GPqEyWOceeUmIuoiohS33afS8DGqJu0f/H/gqpeRaSofm16u/mJWLBIpCctUguSs41N/WFd4Bn7mQG/z6jwi45Qy2f6C5FFR4rOxeRddHqAz3jYdfzhPmXiEStKPf6roXzlYmw4zoHh+x4p2xL5KigYC8/2o7b7BxQtc+hwc/3/Ffbt3ETPrMSoLXe7j9x5WLPJosyStqn7cLi7ZuFeEr8E6RyTnJe/M2uomLpyjYGdJ0uY0MD2cx0Jva2Y5Zd9f7r5sihBPYd+V/gCk3hwQow+CDaoZXdB6/RH0y2AhHcQhT+s3ULHGRru+i+UKvl0q///B6I6Gp1w17Uvh0t26qFdKtyctwJe8PwAzPb56dO8QxvWYXGGuk5Hr9XjrA5oGf9gZL6oTsgJCYNFstbSCb2aq3sEE4u4x001Zrfj8uHqVNdl9UhN9TIzlaVk58lEBJlg0Vjpf3kPqtyAo6hnk78UPJ4bD7j6yn9iU1t9BTSLjTQL+DNMzjzFTa63GT4LMNkHjGBREqcysS3STNSne9HWgCrpJGUSqzc52VaI3bs3OLYYxhqBEmD9rbmuifRTKI/lr6WxcevUsIJmSFB1RXkyhdAJ2byhx90x5qsOjXSOsvGDkBbzYJcaxVD7V6FKz1296ky3Z/ue8vKmNMVjdaXn5DbzYnZ+oorAxvprQ1wtgxXLaeRXLarn6XVGYfTTbaw==
Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.

Question

Find the equilibrium interest rate, r, and the equilibrium level of income Y.

The equilibrium interest rate, r, = /8GnNiFt8aA=%

The equilibrium level of income, Y, = 6sohfSMDfAVHf+m7Ole7HQ==

Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.
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Step 2

Question

Consider the economy of Wiknam.

Suppose that government purchases are increased from 100 to 150. How does the IS curve shift? What are the new equilibrium interest rate and level of income? (Hint: You will need to draw this graphically to answer these questions.)

The IS curve shifts to the y/8elwqLKvMQPfWtffwxDQ== by ygJZKffxRWs=.

The equilibrium interest rate, r, = 8mHGoby8We4=%.

The equilibrium level of income, Y, = WYWjVQzT4dmH8TewByKWKg==.

Question

Suppose instead that the money supply is increased from 1,000 to 1,200. How does the LM curve shift? What are the new equilibrium interest rate and level of income? (Hint: You will need to draw this graphically to answer these questions.)

The LM curve shifts to the y/8elwqLKvMQPfWtffwxDQ== by b0g0iQ1whKk=.

The equilibrium interest rate, r, = lQU/msSmG8pAxHKo%.

The equilibrium level of income, Y, = wl551jLhEfYkzXW3hfnkzg==.

Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.
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Step 3

Question

Consider the economy of Wiknam.

With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rate and level of income?

The LM curve shifts to the yoX+FmCfDVxx7+iS0HQtzg== by xT0dQ64T6ZI= as shown in the graph.

The equilibrium interest rate, r, = auImN4vhA0UVovIL8EuRJw==%

The equilibrium level of income, Y, = AzYnkHgjX/A=.

Question

Below is the graph for the aggregate demand curve for the initial values of 1000 for the money supply, 100 for government purchases, and 100 for taxes. What happens to this aggregate demand curve if fiscal or monetary policy changes, as in parts (d) and (e)?

An increase in government purchases will shift the aggregate demand curve to the YTxupA9odwwbF3kWVI4ZRw==. An increase in the money supply will shift the aggregate demand curve to the YTxupA9odwwbF3kWVI4ZRw==.

Review Chapter 12 pages 346-350, along with Figure 12-5, for a discussion of how to derive the aggregate demand curve from the ISLM model. See Figure 12-6 for details of how changes in fiscal and monetary policy shift the aggregate demand curve. A shift to the right in the aggregate demand curve is shown in the graph below.

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