Intermediate Mac-economic 30 Multiple Chioce

Economics 321 Problem Set #2

Rules: Please post your answers on Canvas. Answers will be available shortly after the deadline.

I. IS/LM Equilibrium Given the following hypothetical economy:

C = 25 + 0:5Y D;

I = 105� 5i; G = 210;

TA = 10 + 0:25Y; Y D = Y � TA; L = 0:5Y � 2i;

where C is consumption, I is investment, i is the interest rate, G is government spending, TA are taxes, Y D is disposable income, and Y is output. L is real money demand. The nominal money supply M is 220; and P , the price level, is exogenous and equal to 1.

Assume, momentarily, that interest rates are equal to zero. 1. What is the constant term in the aggregate demand function:(a) 335; (b) 375; (c) 425; (d) 525; 2. What is the slope term in the aggregate demand function: (a) 0.25; (b) 0.55; (c) 0.375; (d) 0.9;

Now allow the interest rate to vary. 3. What is the constant term of the IS function: (a) 289; (b) 397; (c) 536; (d) 642; 4. What is the slope term of the IS function:(a) -8; (b) -12; (c) -13.1; (d) -15.2; 5. What is the constant term in the LM function: (a) 150; (b) -150; (c) 110; (d) -110; 6. What is the slope term of the LM function: (a) 0.5; (b) 0.6; (c) 0.25; (d) 0.35; 7. What is the level of equilibrium income: (a) 472; (b) 572; (c) 435; (d) 678; 8. What is the equilibrium interest rate: (a) 2; (b) 4; (c) 6; (d) 8;

Suppose a new Federal Reserve chairman is appointed and cuts the money supply back to 100. 9. What is the constant term of the new LM function: (a) -50; (b) -60; (c) 75; (d) 110; 10. What is the slope term of the new LM function: (a) 0.25; (b) 0.45; (c) -0.25; (d) 0.15; 11. What is the new equilibrium interest rate: (a) 16; (b) 28; (c) 42; (d) 12; 12. What is the money multiplier: (a) 5.42; (b) 1.23; (c) 1.33; (d) 2.45;

Suppose a new President is elected and intends to maintain output despite the cut in the money supply. 13. What is the new equilibrium interest rate [HINT: You need to …gure this out before trying to answer 14]: (a) 22; (b) 68; (c) 45; (d) 72; 14. At what level must she set government spending to restore output back to the level in question 7: (a) 429; (b) 342; (c) 12; (d) 510; 15. What is the …scal multiplier: (a) 0.53; (b) 1.29; (c) 2.43; (d) 0.0;

II. Comparative statics Assume that G is 210 and M is 220 as in part I. Solve for the IS or LM expressions, and the …scal and monetary multipliers, holding the other parameters constant, when you:

Raise the marginal propensity to consume to 0:75; 16. What is the constant term of the IS function: (a) 660; (b) 760; (c) 290; (d) 820; 17. What is the slope of the IS function: (a) –11.43; (b) 12.56; (c) 15.62; (d) -5.67; 18. What is the equilibrium level of income: (a) 239.6 (b) 125.9; (c) 522.96; (d) 789.3; [Hint for all the multiplier questions: Raise G and resolve for Y; and then, using the original G; raise M and resolve for Y:] 19. What is the …scal multiplier: (a) 0.29; (b) 2.9; (c) 0.59; (d) 0.22; 20. What is the money multiplier: (a) 2.92; (b) 0.22; (c) 0.56; (d) 1.48;

Raise the interest elasticity of investment to 6; 21. What is the constant term of the IS function: (a) 239; (b) 444; (c) 536; (d) 642; 22. What is the slope of the IS function: (a) -9.60; (b) -2.49; (c) -1.29; (d) 2.87; 23. What is the equilibrium level of income: (a) 432.9; (b) 468.24; (c) 299.9; (d) 237.6; 24. What is the …scal multiplier: (a) 0.47; (b) 1.47; (c) 2.39; (d) 0.39; 25. What is the money multiplier: (a) 5.7; (b) 0.0; (c) 2.2; (d) 1.41;

Raise the income elasticity of money demand to 0:75; 26. What is the constant term of the LM function: (a) -110; (b) -25; (c) -55; (d) -75; 27. What is the slope of the LM function: (a) 0.22; (b) -0.35; (c) 0.38; (d) 0.0; 28. What is the equilibrium level of income: (a) 222; (b) 354; (c) 443; (d) 219; 29. What is the …scal multiplier: (a) 0.4; (b) 0.5; (c) 0.6; (d) 0.7; 30. What is the money multiplier: (a) 0.0; (b) 0.2; (c) 0.4; (d) 1.0;