Consider the following IS-LM model:C=c0+c1(Y-T)I=I'M/P=d1Y-d2ia. Solve for equilibrium output....

Question

Consider the following IS-LM model:C=c0+c1(Y-T)I=I'M/P=d1Y-d2ia. Solve for equilibrium output. Illustrate the equilibrium 
in the ISLM diagram. What is the value of the multiplier?- Now let investment depend on both sales and the interest rate: I=b0+b1Y-b2ib. Solve for the equilibrium output (assume c1+b1c. Derive the multiplier. Is that multiplier smaller or larger than the multiplier you derived in a)d. Solve for the equilibrium interest ratef. Under what conditions on the parameters of the model (c0 , c1 and so on) will investmentdecrease when G increases?g. Explain the conditions you derived in part e)

Robert · Accepted Answer

a)  Y* = [1/(1-c1)][c0-c1T+I+G] 
  The multiplier is 1/(1-c1).
b)  Y* = [1/(1-c1-b1)][c0-c1T+b0-b2i+G] 
 The multiplier is 1/(1-c1-b1).
             Substituting for the interest rate in the answer to part (b), 
  Y* = [1/(1-c1-b1+b2d1/d2)][c0-c1T+b0+(b2/d2)(M/P)+G]. 
  The multiplier is 1/(1-c1-b1+b2d1/d2).
The multiplier is greater (less) than the multiplier in part (a) if (b1-b2d1/d2) is greater (less) than 
zero.    
 The multiplier as measured in part (c) measures the marginal effect of an increase in 
autonomous spending on equilibrium output.   As such, the multiplier is the sum of two effects:

Consider the following IS-LM model: C=c0+c1(Y-T) I=I' M/P=d1Y-d2i a. Solve for equilibrium output. Illustrate the equilibrium in the ISLM diagram. What is the value of the multiplier? - Now let...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment