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Money Demand and IS-LM Analysis Guide

The document outlines a tutorial for ECOS 2002 Intermediate Macroeconomics, focusing on problems related to money demand, equilibrium output, and the effects of government spending using IS-LM diagrams. It includes specific questions about calculating money demand at different interest rates, the impact of income changes on money demand, and the relationship between consumption, investment, and output in the goods market. Additionally, it explores the equilibrium in the money market and how it relates to government spending.

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37 views2 pages

Money Demand and IS-LM Analysis Guide

The document outlines a tutorial for ECOS 2002 Intermediate Macroeconomics, focusing on problems related to money demand, equilibrium output, and the effects of government spending using IS-LM diagrams. It includes specific questions about calculating money demand at different interest rates, the impact of income changes on money demand, and the relationship between consumption, investment, and output in the goods market. Additionally, it explores the equilibrium in the money market and how it relates to government spending.

Uploaded by

dw501450
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

ECOS 2002 Intermediate Macroeconomics

Tutorial 3

Reading Guide: Review Chapters 4 and 5

Problems

1. Suppose a person's yearly income is $60,000. Also suppose this


person's money demand function is given by:

M d =$ Y ( 0.35−i )

a. What is this person's demand for money when the interest rate is 5
per cent? 10 per cent?
b. Explain how the interest rate affects money demand.
c. Suppose the interest rate is 10 per cent. In percentage terms, what
happens to this person's demand for money if the yearly income is
reduced by 50 per cent?
d. Suppose the interest rate is 5 per cent. In percentage terms, what
happens to this person's demand for money if the yearly income is
reduced by 50 per cent?
e. Summarise the effect of income on money demand. In
percentage terms, how does this effect depend on the interest
rate

2. Consider first the goods market model with constant investment.


Consumption is given by:

C=c o +c 1 (Y −T )

and I, G and T are given.

a. Solve for equilibrium output. What is the value of the multiplier for a
change in autonomous spending?

Now, let investment depend on both sales and the interest rate:

I =b o +b1 Y −b 2 i

b. Solve for equilibrium output. At a given interest rate, why is the


effect of a change in autonomous spending bigger than what it was
in part (a)? (Assume c 1 +b1 <1)
c. Suppose the central bank chooses an interest rate of i . Solve for
equilibrium output at that interest rate.
d. Draw the equilibrium of this economy using an IS-LM diagram.
ECOS 2002 Intermediate Macroeconomics

3. Use an IS-LM diagram to show the effects on output of a decrease in


government spending. Can you tell what happens to investment? Why?

Now consider the following IS-LM model:

C=c o +c 1 ( Y −T )

I =b 0+ b1 Y −b 2 i

Z=C+ I +G

i=i

a. Solve for equilibrium output when the interest rate is i . Assume


c 1 +b1 <1
b. Solve for equilibrium level of investment.

Consider the equatuon that characterising the equilibrium in the money


market as:

M
=d 1 Y −d 2 i
P

c. Solve for the equilibrium level of the real money supply when i=i .
How does the real money supply vary with government spending?

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