Assignment:
1. Simple Econ 201 Keynesian Model -Consider an economy in the short-run with the price level P fixed at 1 (P = 1). Other relevant information is:
C = 100 + 0.75 * (Y - T)
I = 750
T = -40 + (1/3)Y
G = 1000;
Y = C + I + G
Answer the following:
(a) Solve for the equilibrium level of income (Y).
(b) How much does the government collect in taxes (T) at equilibrium?
(c) Is there a surplus or deficit and how much?
(d) Calculate the government spending multiplier.
(e) Calculate the new equilibrium level of income if G increases from 1,000 to 1,500 (i.e., ΔG = 500)
(f) Calculate the lump-sum tax multiplier.
(g) Show that C + I +G = Y and that S = I
2) Consider an economy in the short-run with the price level P fixed at 1 (P = 1). Other relevant information is:
C = 100 + 0.75 * (Y - T)
I = 750 - 20 * r
T = -40 + (1/3)Y
G = 1000;
Y = C + I + G
(M/P)d = 0.4 * Y - 48 * i
M s = 1,200
(M/P)d = Ms/P
Suppose investors and bond traders expect inflation, E(π) = 0, so that i = r.
Answer the following:
(a) Calculate the IS curve, i.e., solve for Y in terms of r.
(b) Calculate the LM curve. Again, solve for Y in terms of r.
(c) What are the short-run equilibrium values for Y, r, C, I. [ r will not be in decimal form]
(d) Show that C + I +G = Y and that S = I
(e) Present a properly labeled IS-LM graph showing the equilibrium level of Y and r. Label this point A.
(f) Solve for the new equilibrium the level of Y and r if G is increased by 200 from 1000 to 1200. And show this on your graph prepared in part (e). Label the new equilibrium point B.
(g) What is ? Y/ ?G? Is it the same as 1-/(1-MPC+MPC(t)), If not, explain why?
(i) Set G back at its original level of 1000 and now increase the money supply by 200. Solve for the new equilibrium values of Y and r. Label this on you IS-LM graph as point C.
3) In 2001, the Fed pursued a very expansionary monetary policy. At the sametime, President George W. Bush pushed through legislation that lowered income taxes.
a. Use the IS-LM diagram to describe the situation prior to any such policy changes labeling the economy initially at the equilibrium at point A.
b. Now show the combined effect of the two policies. Label the new equilibrium point B.
Explain what you have done - which curve shifts which way and why!
c. Why would these policies be pursued?
4) Suppose the administration is pursuing and expansionary fiscal policy and at the same time the FED is pursuing a tight monetary policy.
a. Use the IS-LM diagram to show the combined effect of the two policies. Label an initial point of equilibrium before the polies are implemented as point A. Label the new equilibrium after policy implementation point B. Explain what you have done - which curve shifts which way and why!
c. Why would these policies be pursued?