Macroeconomics Answers

Impact of increase in government spending financed by increase in taxes on equilibrium output and price level in classical model

b) State whether the following statements are

TRUE or FALSE. Give reason(s) in support

of your answer. 5

i. Higher the marginal propensity to consume,

higher is the size of multiplier

ii. If investment is very sensitive to interest rate,

then we have a flat IS curve

3.19 the movement from x to x can result from

A. Given that in an economy, , I, MS =300, Mt = 0.4Y, and Mz=125-200r where, Y= income, C= consumption, I= investment, MS= money supply, Mt= transactional-precautionary money demand, Mz= speculative money demand and r= interest rate. Calculate;

 i. The equilibrium level of income and interest rate in this economy.  

 ii. The level of C, I, Mt, and Mz when the economy is in equilibrium

B. Now, assuming the economy is open with government (G) participation and  external trade which is summarized as follows; export(X)= 100-0.10Y, import(M)=50, G=100, Taxes(T)= 100 and C, I, MS, Mt, and Mz the same as defined in (a) above. Calculate;

 i. The equilibrium income and interest rate in this new economy.

 ii. The level of C, I, Mt, and Mz when the economy is in equilibrium

 iii. What exchange rate policy should government implement in (iii) to enhance income and why?