Answer to Question #152908 in Macroeconomics for sara

Question

1. Given that IS-LM model:
C = 100 + 0.5(Y −T) ,
I = 100 −10r , G = T = 50
Where, M = 1000 and P = 5;
a) Please get the IS and LM equations. Get the equilibrium real income and interest rate;
b) If the government expenditure increases by 50, get the new equilibrium for income and interest rate. Calculate the crowding out effect value.
c) Given the money demand function as the following:
m/p+100y-r
Calculate the equilibrium value for IS-LM model. Given that G increase by 50, calculate the crowding out effect for this case;
d) Given that; m/p+100-200r
Analyse the above as the c) case.
e) Compare the case c) and d), what is the conclusion that you can explain for the fiscal policy effectiveness.

Answer 1

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