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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. (5 points)
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