CHAPTER 22 *8 If the consumption function is C * 100 - 0.75Y, I * 200, and government spending is 200, what will be the equilibrium level of output? Demonstrate your answer with a Keynesian cross diagram What happens to aggregate output if government spending rises by 100? Consider a closed economy (NX * 0) and assume the following functions C * a - mpc , (Y - TR + TA) I * I + bir G *G where I is autonomous investment expenditure; ir is the real interest rate, b > 0; TR denotes transfers, which are assumed to be exogenous; and TA denotes taxes, which are given by TA * t , Y, where t is the tax rate on income a Derive the aggregate demand function b Derive the equation for the IS curve The ISLM Model 595 c What is the slope of the IS curve? d Discuss how the slope of the IS curve is affected by b, t, and mpc *10 Consider the following money demand function (in real terms) M * kY + hi P where k is the income elasticity and h is the (nominal) interest rate elasticity of real money balances Assume that k > and that h > Further assume that the quantity of nominal money balances is fixed by the Bank of Canada at M and that the price level, P, is also fixed at P a Derive the equation for the LM curve b What is the slope of the LM curve? c Discuss how the slope of the LM curve is affected by k and h WEB EXERCISES Go to www.fgn.unisg.ch/eurmacro/Tutor/ keynesiancross.html Make sure the following settings are used: t * 0, G * 200; c * 0.8, and m * 0.0 Click on the memorize button Note the value of equilibrium output Now decrease G by 50 What is the value of equilibrium output? What is the implied multiplier? Go to www.fgn.unisg.ch/eurmacro/Tutor/ keynesiancrss.html Make sure the following settings are used: t * 0.25, G * 400; c * 0.8, and m * 0.0 Click on the memorize button Note the value of equilibrium output Now decrease G by 50 What is the value of equilibrium output? What is the implied multiplier? Compare your answer with the answer to Web Exercise Question Be sure to visit the MyEconLab website at www.myeconlab.com.This online homework and tutorial system puts you in control of your own learning with study and practice tools directly correlated to this chapter content