ECO403 Assignment Solution

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