Consider an economy in the short-run with the price level P fixed at 1 (P = 1). Other relevant information is:
a) C = 100 + 0.75 * (Y - T)
b) I = 750 - 20 * r
c) T = 1000; G = 1000;
d) Y = C + I + G
e) (M/P)d= 0.4 * Y - 48 * i
f) Ms= 1,200
g) (M/P)d= Ms/P
h) Suppose investors and bond traders expect inflation, π e= 0, so that i = r.
Answer the following:
(i) Calculate the IS curve. Solve for Y in terms of r.
(ii) Calculate the LM curve. Again, solve for Y in terms of r.
(iii) What are the short-run equilibrium values for Y, r, C, I, private saving, public saving, and national savings.
(iv) Show that C + I +G = Y and that S = I
(v) Present a properly labeled IS-LM graph showing the equilibrium level of Y and r.
(v) What is the government spending multiplier when G increased by 200? That is, what is deltaY/delta G?
(vi) Assume that G is back at its original level of 1000, but the money supply increases by 200. By how much will Y increase in the short-run equilibrium?