ECON208 Tutorial Week 4

Consider the following economy in which

consumption is given by

C = 100 + 0:8 (Y T A + T R) ;

investment is
I = 300 1000i + 0:05Y;
and government spending, taxes and transfers are respectively given by

G = 100;
TA = 150;
TR = 75:
M s M d
Supply and demand for real money balances are P = 100 and P =
0:2Y 1000i

1. Write the equations for the IS and LM functions. Find the equilibrium
levels of output, Y and interest rate, i and represent it graphically.
2. Show, explain and compute the e¤ects on the equilibrium of an expan-
M s
sionary monetary policy such that P = 100

3. Comment on the properties of the …scal and monetary multipliers in this

model.
4. Show, explain and compute the e¤ects on the equilibrium in point 1 of an
expansionary …scal policy such that G = 100: What is the crowding out
e¤ect? Compute it. What should the central bank do in order to eliminate
the crowding out e¤ect on the expansionary …scal policy?