1824 words - 8 pages

Part (A)

IS-LM, Aggregate Demand and Aggregate Supply

Behavioral Equations, Identities, Equilibrium Conditions and List of Exogenous and Endogenous Variable

The IS-LM Model is based upon six Behavioral equations, each describing the determinants of one of the macroeconomic variable considered by the model:

1. Consumption

2. Investment

3. Government spending

4. Tax revenue

5. Money demand

6. Money supply

The description of the IS-LM model is completed by three key identities that are defining the links between aggregate demand, aggregate supply and the equilibrium level of income.

Aggregate demand: Z = C=I=G --------------------------------1

Since ...view middle of the document...

80 (1 – 0.5)]

▲Y 200 + 250

▲r = - 0.6/450 = 0.0013

▲Y

Intercept of IS Curve:

r = C0 + I0 + G0+ Cyd TA0

Cr + Ir

r = 300 + 258.5 + 50 – 0.80 (20.5)

200 + 250

r = 592.1/450 = 1.315

Numerical Value of the Slope & Intercept of LM Curve

Slope of LM Curve:

▲r = Ly

▲Y Lr

=> 0.5/250 = 0.002

Intercept of LM Curve:

r = 1 [M0/p – L0] - ∏e

Lr

r = 1/250 [9150 – 457.5 – 0.02 ]

r = 34.76

Part (C)

Value of Cyd

Cyd = 0.80

Economic interpretation:

Cyd = Marginal Propensity to Consume

Ir = 250

Economic Interpretation

▲I/▲r = Rate change in investment

Rate change in interest

Value of Ly:

Ly = 0.5

Economic Interpretation

▲L/▲y = Rate Change in Demand for Money

Rate Change in Income

Value of Ns w:

Ns = 55 + 10 (1-0.5) w

55 + 5w

Ns w = 5

Economic Interpretation

Ns w = ∂Ns = rate of change in Labor Supply

∂w rate of change in real wage

Part (D)

From Production Function:

Y = A(5N – 0.0025N2) -------------------------------------------------> eq: 1

First we find N (but for N we Find Frist w = MPN)

MPN = W

MPN = A (ƒ1 – ƒ2N)

A = 2 ; ƒ1= 5 ; ƒ2 = 0.0025 ; N = ?

2 (5-0.0025N) = w

10 – 0.005N = w -------------------------------------------------> eq: 2

Now for Ns :

Ns = 55+10 (1- Ty) w

Ns = 55 + 10 (1 – 05) w

Ns = 55 + 5w -------------------------------------------------> eq: 3

Now put value of N eq (3) in eq (2) to find N as Ns = N

w = 10 – 0.005 (55 + 5w)

w = 10 – 0.275 – 0.025w

w – 0.025w = 9.725

w = 9.725/1.025

w = 9

Now put value of w in eq (3) to find N

N = 55 + 5 (9)

N = 55 + 45

N = 100

Now Put the Value of N in eq (1) to Find Y

Y= A (ƒ1 – ½ ƒ2N2)

Y = 2 (5(100) – 0.0025 (100)2)

Y = 2 (500 – 25)

Y = 950

Now find “r” from Good Market by Putting value of Y in eq(5)

Y = C + I + G --------------------------------------------------------> eq:5

But first find T:

T = T0 + TyY

T = 20 + 0.5 (950)

T = 495

Now put value of T and Y in eq(5) to find r

Y = 300 + 0.80 (Y-T) – 200r + 258.5 – 250r + 50

Y = 300 + 0.80 (950 – 495) – 200r +258.5 – 250r + 50

Y = 300 + 364 + 258.5 + 50 – 450r

Y = 972.5 – 450r -------------------------------------------------------------------> IS Equation

Put value of Y0 in IS Equation

Y0 = 972.5 – 450r

450r = 972.5 – Y0

r = 972.5 – 950

450 450

r = 2.16 – 2.11

r = 0.05

Endogenous variable of IS:

For C: C= 300 + 0.80 (y-T) – 200 (r)

C= 300 + 0.80 (950 – 495) – 200 (0.05)

C= 654

For I: I = 258 – 250 (r)

I= 258.5 – 250 (0.05)

I = 246

For G:

G = 50

For Yd : Yd = Y-T

Yd = 950 -495

Yd = 455

Endogenous variable of LM

For L:

L = 0.5 (Y) – 250 (i)

L = 0.5 (950) – 250...

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