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Macroeconomic Equilibrium and Shock Movement Analysis

This problem set involves finding equations for the IS and LM curves, plotting them, and analyzing the equilibrium output and interest rate for an economy. It also includes analyzing the effects of changes in government spending and money supply on the short-run equilibrium levels of output and exchange rates.

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Added on  2022-10-12

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This document provides an analysis of macroeconomic equilibrium, IS-LM model, fiscal and monetary shocks, and their effects on the economy. It includes equations and examples to explain the concepts in detail. The document also discusses the effects of government spending and money supply on the output and exchange rate of the economy. Additionally, it explains the difference between fixed and flexible exchange rate regimes and their impact on fiscal and monetary policies.

Macroeconomic Equilibrium and Shock Movement Analysis

This problem set involves finding equations for the IS and LM curves, plotting them, and analyzing the equilibrium output and interest rate for an economy. It also includes analyzing the effects of changes in government spending and money supply on the short-run equilibrium levels of output and exchange rates.

   Added on 2022-10-12

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a) IS equation with Y=C+I+G+X-IM
so , Y= 26+0.6*(Y-10)+23-50r +10+6-∈ -( 2+3∈)
0.4Y= 26-6+23+10+6-2-2∈ -50r
Y = 2.5 *( 57 -2∈-50r)
Y= 142.5-5∈-125r
Macroeconomic Equilibrium and Shock Movement Analysis_1
b) LM equation will equate the Real Money Supply (Ms/P) and Money Demand
5Y-50r= 492 ,
Y= 98.4 +10r
c) Aggregate Demand function will be right side of the IS curve so
AD = C+I+G+X-M , AD = 57 -2∈-50r +0.6Y
d) IS Curve in terms of r
Macroeconomic Equilibrium and Shock Movement Analysis_2
e) IS -LM in terms of ∈
f) Equation IS -LM equation to find the output
142.5-5∈-125r = 98.4 +10r , here r of 0.16
142.5 -5∈-125* 0.16= 98.4+10*0.16 ,
∈=4.5
Y = 100
g) Now when the Government Expenditure increase an amount of 2 , due to multiplier the Y will
increase by 2.5 times , so Ynew will be 100+2.5* 2 = 105
with this Y , the exchange rate will be
122.5 -5∈=105
∈=3.5
Macroeconomic Equilibrium and Shock Movement Analysis_3

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