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1. The economy of Clintonia has the following macroeconomic
relationships:
C = 2,000 + 0.75 (Y – T); I = 12,000 – 1,500 r; G = 23,000;
X = 4,000; M = 5,000 + 0.1 Y; T = 5,000 + 0.20Y; Md = 0.50 Y –
3,500 r; Ms = 31400; Yp = 63,400

(a) The IS equation for this economy is: Y = _____________ –
_________ r. (5 points)

(b) The LM equation for this economy is: Y = ____________ +
_________r. (5 points)

(c) Given the above IS/LM equations for this economy, the
equilibrium values of: Y = ________; r =_______; T = ________; C =
_______; I = _________; Budget Deficit = __________; and Trade
Deficit = ___________. (7 points)

(d) Using the given Yp value, we can say that this economy has a
problem of RECESSION / INFLATION: __________________ (write your
answer here). (3points)

(e) Use the original macroeconomic relationships and find out
the required change in G to bring the economy from its current
equilibrium GDP level to the full employment level of GDP or Yp.
The required change in G is: ________. (5 points)

(f) Suppose the government wants to use changes in To instead of
G to bring the economy to Yp. Then, the required change in To
is____________. (5 points)

(g) Now, suppose that the government wants to use monetary
policy instead of fiscal policy to bring the economy to Yp. Then,
the change required in Ms is __________. (5 points)

(h) Compare the changes in equilibrium values of Y, r, T, C, I,
Budget Deficit, and Trade Deficit under each policy action in parts
(e), (f), and (g). Which of these policy actions, if any, would you
prefer based on your analysis of the changes in equilibrium values
of the variables listed above. Why? (5 points)