Practical exercises is lm model

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PRACTICAL EXERCISES

CHAPTER 5: GOOD AND FINANCIAL MARKETS. THE IS LM MODEL

1.-Given the following functions describing the behavior of agents in an economyC= 40+ 0,8 (Y – T)

I = 70 – 2i

T = 20

G = 16

Calculate:

1. - Equilibrium equation in the economy Y = C + I + G

2.- Calculate the ISrelation of the economy ( Y = f ( i ), o i = f( Y )

3.- Calculate the new IS relation if now investment function change to

I2 = 80-2i

4.- calculatethe value in equilibrium of Y, C and I if i = 10%.

5.- Represent The IS curves calculated previously and the equilibrium values of I and Y.

2.- Supposethe monetary sector of an economy can be represented by the following equations

Money supply Ms = 200

Money Demand Md = 0,2Y – 4 i

Calculate

a) Theequation of the LM relation

b) If the Money supply changes to Ms = 210 calculate the new LM curve

c) Explain why has change the new LM curve

3.-Consider aneconomy represented by the following equations:

Goods Market

C = 80 + 0,8 (Y – T)

I = 150 – 6 i

G = 20

T = 0

Financial Market

Money Supply Ms = 150Money Demand Md = 0,2Y – 4 i

Calculate

a) Equilibrium in the goods markets ( IS curve )
b) Equilibrium in the financial markets ( LM curve)
c) Yand i of equilibrium in the whole economy
d) The following changes take place:
i. Ms = 200. Calculate the new LM curve and the new Y and i ofequilibrium in the economy. Comments whas has happened.
ii. G = 70 Calculate the new IS curve and Y and i of equilibrium in the economy. Explain what has happened.
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