Economics 305 Fall 2016 Dr. Neri Problem Set No. 6 due in class on Monday November 14 2016 Late submissions and e-mail submissions will not be…

**** I also attached the problem set as .pdf file below. It is easier to read*******

Economics 305 Dr. Neri

Fall 2016

Problem Set No. 6 due in class on Monday November 14 2016

Late submissions and e-mail submissions will not be accepted.

1. Consider the following description of the real sector of the economy:


C = C0 + mpc x YD

YD = Y – T

T = T0 + tY

I= d ‐ er

G = G0

Answer the following questions by rearrange terms and solve for r in terms of Y. We in fact place r on the vertical axis when we draw the IS-curve.

a. Draw the IS-curve. What is formula for the slope of the IS-curve, Δr/ΔY?

b. If e = 0, draw the investment curve and the IS-curve. What does this imply?

c. How is the slope of the IS-curve affected as e increases?

d. What happens when e = ∞? What does this imply?

2. Consider the following description of the financial sector of the economy:

(M/P)d = f + g(Y) – h(i),

πe = 0 => i = r

Ms = M0


a. Draw the LM-curve. Solve for the LM-curve expressing r in terms of Y

b. What is the slope (Δr/ΔY) of the LM-curve.

c. Draw the LM-curve if h = 0. What does this mean?

d. What happens to the slope of the LM-curve as h increases?

e. What does the LM-curve look like if g = 0, that is Y does not affect the demand for money?

3. Use the IS-LM/ AD-AS model to show the short-run and long-run impacts of a decrease in money supply (M) on the real interest rate (r), real GDP (Y), the unemployment rate, investment spending (I), consumption spending (C), the nominal money supply (M), the price level (P) and the real value of the money supply(M/P). You must present properly labeled (IS-LM and AD-AS diagrams to show the SR and LR effects. Initial equilibrium points should be labeled “A”; short-run equilibrium points should be labeled “B”; and the LR should be labeled “C”. Also, present individual time graphs such as the graphs I use in class to show the impacts on EACH of these variables over time. Again use the “A”, “B”, “C” convention.

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