a.
To describe: The equation of IS curve, as per Keynesian closed economy theory.
a.
Answer to Problem 3NP
The equation for IS curve will be
Explanation of Solution
Given data:
Consumption | |
Investment | |
Government purchases | |
Taxes | |
Full employment output | |
Money supply | |
Real money demand | |
Expected inflation |
The IS curve equation in the following manner:
Substitute values from above,
Then,
Or,
Equivalently,
b.
To describe: The equation of LM curve in the short run, while the price level remains fixed at
b.
Answer to Problem 3NP
The equation for LM curve will be
Explanation of Solution
Or,
Equivalently,
Or,
c.
To describe: The new output levels, real interest rate, consumption and investment.
c.
Answer to Problem 3NP
The new output level is
Explanation of Solution
The equilibrium of short run is achieved at a point where the curves IS and LM intersect each other.
Now, we shall equate both the equations,
On solving these two equations, we get,
We get,
Then, we get
d.
To describe: The new output levels, real interest rate, consumption, investment and price level for long run.
d.
Answer to Problem 3NP
The new output level is
Explanation of Solution
The real interest rate can be calculated as follows:
We get,
As the price is variable in the long run, the new LM curve can be derived as follows:
The results will be as follows:
Substitute value of
We get,
Substitute, given values:
We get,
e.
To describe: The velocity value in the equilibrium of long run.
e.
Answer to Problem 3NP
The velocity value in the equilibrium of long run is
Explanation of Solution
According to the quantity theory of money;
Now, substitute the value of
We get,
f.
To describe:
If
f.
Answer to Problem 3NP
The level of taxes (T) is
Explanation of Solution
When
With the proposed conditions, the long run IS curve equation will turn out as follows:
Now,
Substitute
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