ECO403 Assignment Solution

Question#1

What will be the effect of following events on the IS and LM curve?
A. A decrease in money demand caused by the introduction of a new
electronic money card
B. A decrease in the money supply
C. An increase in government taxes

Solution:

A. No effect on the IS curve and LM curve shifts to the downward

B:negative effect on the IS curve and LM curve shifts on the Upward

C : Is curve moves to the leftward and LM curve have no effect



Question#02
(A)In the Keynesian cross, assume that the consumption function is given
by:
C = 100 + 0.5 (Y-T)
If planned investment = 100
Government purchases and taxes are both 50
Then calculate the equilibrium level of income.

Solution:(This is just 4 an idea plz complete all the steps)

you can use the formula for this:

Y= C + I + G

Y = 100 + 0.5(Y – 50) + 100 + 50

after calculation we get

Y = 450

and Y is the Equibilium level of income


(B) Suppose that money demand function is:
(M/P)d = 1000 – 100r
Where r is the interest rate in percentage, money supply (M) is 1000 and the
price level (P) is 2. What is the equilibrium interest rate?

Solution:

(M/P)d = 1000 – 100r

(1000 / 2) = 1000 - 100r

after calculation we get

r = 5