Question

# Consider the economy of Hicksonia.

a. The consumption function is given by

C=300+0.6(Y−T).

The

investment function is

I=700−80r.

Government purchases and taxes are both 500. For this economy, graph the IS

curve for r ranging from 0 to 8.

b. The money demand function in Hicksonia is

(M/P)d=Y−200r.

The money supply M is 3,000, and the price level P is 3. Graph the LM curve for

r ranging from 0 to 8.

c. Find the equilibrium interest rate r and equilibrium income Y.

d. Suppose that government purchases are increased from 500 to 700. How does

the IS curve shift? What are the new equilibrium interest rate and income?

e. Suppose instead that the money supply is increased from 3,000 to 4,500. How

does the LM curve shift? What are the new equilibrium interest rate and

income?

f. With the initial values for monetary and fiscal policy, suppose the price level

rises from 3 to 5. What happens? What are the new equilibrium interest rate

and income?

g. For the initial value of monetary and fiscal policy, derive and graph an

equation for the aggregate demand curve. What happens to this aggregate

demand curve if fiscal or monetary policy changes, as in parts (d) and (e)?

Macroeconomics