Consider A Simple Keynesian Income-Spending Model Of An Economy: Macro Economics Assignment, MU, Ireland

1. Consider a simple Keynesian income-spending model of an economy described by the following equations

C = 210 + 0.75Yd

I = 300

G = 235

TR= 120

T = 100

M = 0.15Y

X = 250

(a) Calculate the equilibrium level of income.

(b) Sketch this equilibrium position using a two-dimensional graph.

(c) Suppose the government increases public expenditure on goods and services by 15. Estimate the change in the equilibrium level of income. What is the new equilibrium level of income?

2. Consider an IS/LM model of an economy with the following equations

C = 210 + 0.75Yd

I = 165-10i

G = 490

Tr= 300

T = 0.15Y

Ld = 0.2y – 3i

Using the above data, derive the equation for the IS curve. What is the equation for the LM curve? Calculate the equilibrium level of income and interest rates. Sketch the relevant diagram.

What are the values of the monetary policy multiplier with respect to income and interest rates? If the money supply is reduced by 50, what are the new market-clearing income and interest rate levels?