This document contains two exercises on macroeconomic modeling using the IS-LM framework:
1) The first exercise provides data for an economy and asks to determine the equilibrium output, interest rate, and government budget deficit under different assumptions about how the deficit is financed.
2) The second exercise provides data for a closed economy and asks to determine the initial equilibrium interest rate and the change in government spending needed to achieve full employment.
This document contains two exercises on macroeconomic modeling using the IS-LM framework:
1) The first exercise provides data for an economy and asks to determine the equilibrium output, interest rate, and government budget deficit under different assumptions about how the deficit is financed.
2) The second exercise provides data for a closed economy and asks to determine the initial equilibrium interest rate and the change in government spending needed to achieve full employment.
This document contains two exercises on macroeconomic modeling using the IS-LM framework:
1) The first exercise provides data for an economy and asks to determine the equilibrium output, interest rate, and government budget deficit under different assumptions about how the deficit is financed.
2) The second exercise provides data for a closed economy and asks to determine the initial equilibrium interest rate and the change in government spending needed to achieve full employment.
This document contains two exercises on macroeconomic modeling using the IS-LM framework:
1) The first exercise provides data for an economy and asks to determine the equilibrium output, interest rate, and government budget deficit under different assumptions about how the deficit is financed.
2) The second exercise provides data for a closed economy and asks to determine the initial equilibrium interest rate and the change in government spending needed to achieve full employment.
T = 0.2Y T = tax revenue I = 800 − 1500i I = investment i = interest rate G = 760 G = government spending d L = 0.1Y − 500i Ld = demand for money
Central Bank Balance Sheet
Assets Liabilities Gold 55 Currency 60 Loans to commercial banks 35 Commercial bank reserves 100 Government bonds 70 Banking System Balance Sheet Assets Liabilities Reserves 100 Checkable deposits 260 Loans 195 Loans from the central bank 35
All amounts above are expressed in real terms.
a) Determine the equilibrium levels of output and of the interest rate. In addition, determine the government budget deficit under the assumption that the government finances its deficit spending by selling bonds to private investors. b) How do previous results change if we assume that the government forces the central bank to buy the newly issued bonds in order to finance the deficit spending? (Assume that households and firms do not alter their preferences about holding cash and deposits.)
Ex 2 To protect the domestic producers from international competition, the government of the Republic of Maradagàl decided to cease all economic relationships with the rest of the world. However, current national output is 8% below its potential and the government wants to increase spending in order to bring the economy to full employment. Consider that: a) The central bank has the following balance sheet (in real terms):
b) The required reserve ratio is 0.1, while the amount of free reserves is negligible. c) The real demand for money is Ld = 0.25Y − 500i . d) The labour force is 7000 and average labour productivity is 0.5. e) The income multiplier is equal to 2 while investments increase by 2 units if the interest rate falls by 1%.
Determine: 1) The interest rate associated with the initial equilibrium. 2) The variation in government spending that is required to reach full employment.
1 Solution 1 a) At equilibrium income is 3600, the interest rate is 8%, the budget deficit is 40. b) In this case the central bank cannot manage the money supply independently. At the new equilibrium income is 3726.31, the interest rate is 4.63%, the budget deficit is 14.73.
Solution 2 1) The initial interest rate is 0.01%. 2) ∆G = 168.
