GroupAssignment

1. ConsiderthefollowingnumericalversionoftheISMPmodel(Refertothe handout). GoodsMarket: C=400+0.5YD I=7004000r G=200 T=200 MoneyMarket: Realmoneydemand:(M/p)d=0.5Y7,500r Thesupplysideisrepresentedbytherealinterestrate:r=8%. P=1. Trytokeepdecimalfractions(like0.0667)intheformofsimplefractions (2/30)untilcalculatingyourfinalvaluesforY,r,andsoforth. a. FindtheequationfortheIScurve.[Hint:Goodsmarketequilibrium.You wantanequationwithYonthelefthandside,allelseontheright.] b. WhatistheequationfortheMP(MonetaryPolicy)curve? c. Solvefortheequilibriumrealoutput(Y). d. Obtaintheamountofmoneydemanded(M/P)datthisequilibrium point.WhatistheimpliedvalueforMoneysupply(Ms). e. Solvefortheequilibriumvaluesofconsumptionspendingand investmentspending,andverifythevalueyouobtainedforYbyadding upC,I,andGandthebudgetbalance. f. Whatisthesizeofthemultiplier? g. Nowsupposethatgovernmentspendingincreasesby500to700. Summarizetheeffectsoftheexpansionaryfiscalpolicyinpartfby statingwhathappenedtoY,r,C,Iandthebudgetbalance. h. Setallvariablesbacktotheirinitialvalues.Now,supposethatthe centralbanklowerstherealinterestrateby3%.SolveagainforY,C, (M/P)dandI.