Answer to Question #312146 in Macroeconomics for Sima

Question

QUESTION ONE (30 Marks)

Consider a closed economy that is characterized by the following equations:

Y = C + I + G

C = 900 + 0.5(Y − T)

I = 750 − 30r

T = 800

G = 1200

Md = Ms

Ms = 1500

Mt = 0.7Y

Msp = −80r

Where Y is the GDP, C is private consumption expenditure, I is the Investment expenditure, G

is government expenditure, T is tax revenues, Ms

is money supply, Mt

is transaction demand

for money, Msp is the speculative demand for money and r is the interest rate (in % points).

a) Derive (Md⁄P) the demand for real money balances equation (where P is the aggregate price level

Answer 1

Money demand= Mt + Msp= 0.7Y+ -80r

= 0.7Y- 80r

LM = Md = Ms

0.7Y- 80r= 1500

0.7Y= 1500+ 80r

Y= 2142.86+ 114.286r