Q. -Ch.

-10(a)

The following describes an economy :

(M / P) = 0.5 Y - 20 i , where (M / P ) = 800

IS curve : Y = 4000-80i , assume G = 3
(i) What is the effect of an increase in government expenditure by Rs 400 , on income and interest
(ii) How much is the crowding out of investment by the increase in government expenditure ?
(iii) If the LM curve changes to : 800 = 0.5 * Y , how would your answer to (i) and (ii) change ?

Q. -Ch.-10(b)

The following describes an economy :

L = 0.20 Y - 60 i , and (M / P ) = 500

C = 100 + 0.75*(1-0.25)*Y , I = 1000 - 40 i , G = 500
(i) What is the equilibrium income and interest rate ?
(ii) To make the equilibrium income equal to 5000, without any change in the interest rate, how mu
the increase in government expenditure and the supply of real balances ?

Q. -Ch.-11(a)

The following describes an economy :

C = 50 + 0.9*Yd , T = 0.2*Y , I = 400

X = 300 , Q = 0.2 Y , Trade Balance is equal to -2575 , (where 'X' denotes exports and 'Q'
(i) Calculate the government expenditure 'G' , and exports 'X' , so as to make the equlibrium incom
without any change in the trade balance ?
Q. -Ch.-11(b)

The following describes an economy :

C = 40 + 0.8*Yd , T = 0.3*Y , I = 400 - 10 i , G = 500 , X = 200, Q = 5 + 0.2*Y , wher

L = 0.2 Y - 40i ; (M / P ) = 300
(i) Calculate the equilibrium income, interest rate and trade balance ?
(ii) How much I will change for an increase in G to 600 ?

Q.-Ch.-5

The features of an economy is described below:

C = 200 + 0.75(1-t)Y
I = 1200 55 i
G = 1500
L = 0.3 Y 75 i

The nominal money supply in the economy is 800. Determine the equation of the aggregate demand
when tax rate is 30%.

If the tax rate is increased to 35% and government expenditure is simultaneously increased to
2000, what will be the change in the slope of such aggregate demand curve? Explain the result.
 (i) (i)

LM curve : 800 = 0.5Y-20i LM curve : 2Y = 3200 + 80i

LM curve : 2Y = 3200 + 80i shifted IS curve, IS' : Y = [ 4000

IS curve : Y = 4000 - 80i IS' : Y = 5200 - 80i

solve the simultaneous equation system to get : solve the simultaneous equation

Y = 2400 and i = 20 Y = 2800 and i = 30

(ii) (iii)

LM curve : 2Y = 3200 + 80i LM curve : 800 = 0.5Y

IS curve can be written in the form : LM curve : Y = 1600

IS : Y = G[A - bi] IS curve : Y = 4000 - 80i

IS : Y = 3[(4000/3) - (80/3)i] solve the simultaneous

equation system to get
IS' : Y = 3[{(4000/3) + (1200/3)} - (80/3)i]
Y = 1600 and i = 30
IS' : Y = 3[(5200/3) - (80/3)i]

it follows that, I = IBAR - (80/3)i

I = [IBAR - (80/3)*30) ] - [IBAR - (80/3)*20) ]

I = - (80/3)*30) + (80/3)*20) ]

I = - (80/3)*(30-20)

I = - (800/3)
ve : 2Y = 3200 + 80i

IS curve, IS' : Y = [ 4000 + (3*400) ] - 80i

= 5200 - 80i

he simultaneous equation system to get :

00 and i = 30

ve : 800 = 0.5Y LM curve : 800 = 0.5Y

ve : Y = 1600 LM curve : Y = 1600

e : Y = 4000 - 80i IS' curve : Y = 5200 - 80i

he simultaneous solve the simultaneous

on system to get equation system to get

00 and i = 30 Y = 1600 and i = 45

I = [IBAR - (80/3)*45) ] - [IBAR - (80/3)*30) ]

I = - (80/3)*45 + (80/3)*30

I = - (80/3)*(45-30)

I = - (80/3)*15

I = - 400
 (i)

Y=C+I+G

Y = [ 100+ 0.75*(1-0.25)*Y ] + [ 1000 - 40 i ] + [ 500 ]

IS : (7/16)Y = 1600 - 40i

LM : 500 = (1/5)Y -60i

LM : (1/5)Y = 500 + 60i

IS : (7/16)Y = 1600 - 40i

solve the simultaneous equation system to get :

Y = (14500 * 64) / 274 (M/P) = 822.62

i = (1/60)*[(1/5)*{(14500*64)/274}-500]

Y = 3386.8613

i = 2.9562
 (ii)

Y=C+I+G

5000 = [ 100+ 0.75*(1-0.25)*5000 ] + [ 1000 - 40 * 2.9562 ] + [ G ]

solve for G

G = 1205.7482

(M / P) = (1/5)*5000 - 60*2.9562

(M / P) = 822.6277

G = 1205.7482 - 500

(M/P) = 822.6277-500

G = 705.7482

(M/P) = 322.6277
 (i)

Trade Balance = -2575 Y = C + I + G + (X-Q)

X - Q = -2575 16000 = [ 50 + 0.9*(16000 - 0.2*16000) ] + [ 400

300 - 0.2*Y = -2575 solve for G

Y= 14375 G= 6605

X - Q = -2575

X - 0.2*16000 = -2575 ; Q = 3200

X= 625
0 - 0.2*16000) ] + [ 400 ] + [ G ] + [-2575 ]

Q = 3200
 (i)

Y = C + I + G + (X-M)

Y = [ 40 + 0.80*(1-0.30)*Y ] + [ 400 - 10 i ] + [ 500 ] + [ 200 - ( 5 + 0.2*Y ) ]

Y - (0.8)*(0.7)Y + 0.2*Y = 1135 - 10i

IS curve : 0.64*Y = 1135 - 10i

LM curve : 300 = 0.2*Y - 40i

LM curve : 0.20*Y = 300 + 40i

IS curve : 0.64*Y = 1135 - 10i

solve the simultaneous equation system to get :

Y = 1753.6232

i = 1.2681

and then

(X - Q) = 200 - ( 5 + 0.2*1753.6232 )

(X - Q) = -155.7246
 (ii)

Y = C + I + G + (X-M)

+ 0.2*Y ) ] Y = [ 40 + 0.80*(1-0.30)*Y ] + [ 400 - 10 i ] + [ 600 ] + [ 200 - ( 5 + 0.2*Y

Y - (0.8)*(0.7)Y + 0.2*Y = 1235 - 10i

IS curve : 0.64*Y = 1235 - 10i

LM curve : 300 = 0.2*Y - 40i

LM curve : 0.20*Y = 300 + 40i

IS curve : 0.64*Y = 1235 - 10i

solve the simultaneous equation system to get :

Y = 1898.5507

i = 1.9928

I = 400 - 10i ; I = 400 - 10*(1.9928)

I = 380.0725

I = [ 400 - 10*(1.9928) ] - [ 400 - 10*(1.2681) ]

I = 10*(1.2681) - 10*(1.9928)

I = -7.2464
[ 600 ] + [ 200 - ( 5 + 0.2*Y ) ]
 c 0.75 c 0.75
t 0.30 t 0.35
1-t 0.70 1-t 0.65

G 2.1053 G 1.9512

k 0.30 k 0.30
b 55.00 b 55.00
h 75.00 h 75.00

b/h 0.7333 b/h 0.7333

k*G*(b/h) 0.4632 k*G*(b/h) 0.4293

1+(k*G*(b/h)) 1.4632 1+(k*G*(b/h)) 1.4293

1.4388 1.3652

1.0552 1.0011

A 2900 A 3400

M 800 M 800

-M -844.1247 -M -800.9101

A 4172.6619 A 4641.6382
 4177.6252

845.129939

800.8008

4639.23924