question archive Suppose that the following sets of equations describe ALL the relevant information about a country's money market and goods market
Suppose that the following sets of equations describe ALL the relevant information about a country's money market and goods market
Subject:EconomicsPrice: Bought3
Suppose that the following sets of equations describe ALL the relevant information about a country's money market and goods market. The Money Market is described as follows: - Money Demand function: M d = Y + 2P — 2507' - Money Supply: M S = 4800 ~ Price Level: P = 152 - Required reserve ratio (1'1'1') = 18% Total reserves = required reserves; Excess reserves = 0 The Goods Market is described as follows: Consumption ?mction: C = 400 + 0.9Yd A Flamed Investment function: I d = 410 — 1907' - Government expenditures: G = 200 - Taxes: T = 80 - Exports: EX = 40 ~ Imports: IM 2 50 + 0.1Y (a) Derive the equations for the IS and LM curves and solve for equilibrium Y * and r*. (6 pts + 5 pts) (b) The country's Parliament wants to increase spending on social safety nets, and therefore increases taxes by $40 and increases government spending by $40. What is the new equilibrium national income, Y, and the equilibrium interest rate 'I"? (4 pts + 4 pts) (0) Calculate the effective balanced-budget multiplier. (4 pts) ((1) After ?scal action by the Parliament in (b), the country's central bank announces that given the good shape of the economy, it wants to target a lower interest rate of 8% to create future monetary space for itself. To do so, it takes the route of Open Market Operations (0M0). Under OMO, will the central bank buy or sell bonds to get to a lower interest rate? What value of bonds will the central bank buy or sell to get to an interest rate of 8%?
