747 words - 3 pages

Homework Week 2

Chapter 3 #2:

a. (1-c)/ 1- .6 =.4

b. (Ca – cTa +Ip + G +NX)/ 1500 -10r - .6(1800) +2400 -50r + 2000 – 200= 4620-60(3) = 4438

c. Take the answer from a and divide it by the answer from b. 4438/.4 = 11095

d. .04(3) = 480,000,000,000

e. 4438 – 480 = 3958. 3958/.4 = 9895

f. (9895 – 11095)/ (3985 – 4438) = -1200/ -453 = 2.64

g. 11,095 is the magic number

a. G increases and tax and interest stay the same. G must go up by 480 billion to put the economy back in equilibrium

b. 480,000,000,000/ -.6 = 800,000,000,000. Congress must decrease taxes by 800 billion

c. Government spending and taxes must go up by 75 billion

d. ?

Chapter 4

1.You are given the following equation for the real demand for money: (M/P)d = .25Y- 50r

(a)Compute the demand for money for each of the following interest rates when income is equal to $11,940, $12,000, $12,060,$12,120, and $12,180:

R= 4.4 r= 4.7 r= 5.0 ...view middle of the document...

Label this curve LM1.

(e)Suppose the real money supply decreases to $2,720. Given your answers to part a, find the new combinations of the interest rates and real income at which the money market is in equilibrium. Use these combinations to graph the new LM curve, given that the real money supply now equals $2,720. Label this curve LM2.

Ans:

a) Consider the following table,

| | | | Income ($) | | |

| | | $11,940 | $12,000 | $12,060 | $12,120 | $12,180 |

| | | | | | | |

Interest Rate | 4.4 | | $2,765.00 | $2,780.00 | $2,795.00 | $2,810.00 | $2,825.00 |

| 4.7 | | $2,750.00 | $2,765.00 | $2,780.00 | $2,795.00 | $2,810.00 |

| 5 | | $2,735.00 | $2,750.00 | $2,765.00 | $2,780.00 | $2,795.00 |

| 5.3 | | $2,720.00 | $2,735.00 | $2,750.00 | $2,765.00 | $2,780.00 |

| 5.6 | | $2,705.00 | $2,720.00 | $2,735.00 | $2,750.00 | $2,765.00 |

| 5.9 | | $2,690.00 | $2,705.00 | $2,720.00 | $2,735.00 | $2,750.00 |

| 6.2 | | $2,675.00 | $2,690.00 | $2,705.00 | $2,720.00 | $2,735.00 |

Here each cell tells us the real demand for money corresponding to the row interest rate and column income. To be more clear 1st cell value $2,765.00 is the real demand for money at income $11,940 and at interest rate 4.4.

b) The required graphs are given below,

c) At the equilibrium money market the real demand for money and real supply for money would be at the same point. Now from the table in Part we can obtain the combinations of point for the real money supply $2,750, where the real demand for money and the real supply of money are equal. And these points of combinations of real income and interest rate are: (11,940, 4.7); (12,000, 5.0) ; (12,060, 5.3); (12,120, 5.6); and (12,180, 5.9). So plotting these points we got the following graph.

d) Now if the real money supply increase to $2,780, we will get the new sets of points as:

(12,000, 4.4); (12,060, 4.7) ; (12,120, 5.0); (12,180, 5.3). For these combinations we got the following graph.

e) If the supply decreases to $2,720, the new points (11,940, 5.3); (12,000, 5.6) ; (12,060, 5.9); (12,120, 6.2) is giving the following graph.

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