Answer to Question #286254 in Accounting for mwafrikka

Question

Consider the following equations for a small open economy for both the goods and money markets.

C = 3000 + 0.8Y^d; T = 1000 + 0.3Y; G = 6000; TR = 500; I = 4000 + 0.24Y – 100r; M = 3000 + 0.2Y; X = 2000; L_P = 1000 + 0.15Y; L_T = 2000 + 0.25Y – 15r; Ls = 1000 – 35r; MS = 40,000; P= 4

a.      Derive both the IS and LM equations for the economy and compute the Equilibrium level of Income and Interest Rate.

b.     At this equilibrium level of income and interest, compute the levels of disposal income, total transactions demand for money, investment demand and the value of net exports.

c.      Suppose the government raises govt. expenditure by 20% in order to increase aggregate demand. Show how this policy results in the crowding out effect.

Answer 1

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