Macroeconomics Answers

Consider a hypothetical economy characterized by the following behavioral equation IS                                  LM:

C=400-200r+0.2Y              Md=Y-1000r

I= 240-400r                        Ms=800

G=200                                 P=2

a)     derive the equations of the IS and LM curves of the economy

b)     Find the equilibrium income level and the interest rate simultaneously.

1.     Assume a closed economy and no government. Also assume consumption

               C=50-0.8Yd and investment I=80

a)     find the equilibrium output

b)     what is the implied multiplier

Do as you are being directed.

1. Assume that our economy is in deep recession now due to Corona virus pandemic. What government 

should to help economy revive according to:

a. Classical model

b. Keynesian model

c. Monetarist model

d. New classical model

Use graphs to elaborate your answers.

Suppose that government changes its fiscal policy and imposes income tax on the per hour wage that 

labor earns. This would affect output and employment in Classical Model. True or false give reson in five lines

5. It is possible that the interest rate might affect consumption spending. An increase in the in-

terest rate could, in principle, lead to increases in saving and therefore a reduction in con-

sumption, given the level of income. Suppose that consumption is, in fact, reduced by an 

increase in the interest rate. How will the IS curve be affected?

5. Discuss, using the IS-LM model, what happens to interest rates as prices change along a 

given AD schedule.

2. Suppose the government cuts income taxes. Show in the IS-LM model the impact of the tax cut un-

der two assumptions: (1) The government keeps interest rates constant through an accommodating 

monetary policy. (2) The money stock remains unchanged. Explain the difference in results.

1.If a Japanese car costs 500,000 yen, a similar American car costs $10,000, and a dollar can buy 100 yen, what are the nominal and real interest rates?