Macroeconomic Theory (AS.440.602) Fall 2023 Problem Set 2
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Macroeconomic Theory (AS.440.602)
Fall 2023
Problem Set 2
Due: Friday, September 14, 2023
1) Consider the following economy:
C = 660 + 0.8YD
I = 100 + 0. 1Y − 2000i
G = 200
T = 200
d = 0.2Y − 1000i
S = 600
A. Find the IS curve and LM curve.
B. Calculate the equilibrium interest rate and output.
2) Suppose that:
C = c0 + c1 YD
I = I0 + aY − ki
G = G0
T = T0
d = Y − yi
S = M
A. Find the IS curve and LM curve.
B. Calculate the equilibrium interest rate and output.
3) In all parts, assume that net taxes (T) are not a function of output (Y).
A. Based on the IS-LM model, when will the rise in government spending (G) surely lead to an increase in consumption (C)? Explain. Your answer should be backed by accurate graphs.
B. Based on the IS-LM model, when will the rise in government spending (G) surely lead to a decrease in consumption (C)? Explain. Your answer should be backed by accurate graphs.
C. Based on the IS-LM model, when will the rise in government spending (G) surely leave consumption (C) unchanged? Explain. Your answer should be backed by accurate graphs.
D. If the government increases spending (G) and net taxes (T) by the same amount, output (Y) will not change. True/False? Explain using the right equation(s).
2023-12-16