IS-LM closed economy – SR
The Economy of North Haverbrook is described by the followingagents and characteristics.
consumers C = 50 + 0.85 (Y-T)
(taxes) T = 100
(government expenditures) G = 100
(investments) I = 500 – 50r
(money supply) M = 3,000
(price levels) P = 1
(money demand) L (r,Y) = Y – 10r
(potential output) Y* = 3200
The goods and services markets in equilibrium is described as: Y= AE, where AE = C + I + G, and money market is in equilibrium whenM/P = L(r,Y).
[2 points each, except for h) 4 points]
- Find the aggregate expenditure function
- Find the IS curve
- Find the LM curve
- Find the equilibrium exchange rate and output (Y, r)
- Find the aggregate demand curve
- Find Private savings, Public Savings and National savings
- Do we have an expansionary gap or recessionary gap? Whatsize?
- If fiscal policy is used (government expenditure: G), how much+/- change will be required to close the gap?
- If fiscal policy is not used, how will the gap close? (impacton prices and output – you can graph a diagram if it helps)
