Consider the following IS-LM model:
C = 225 + 0.56Y_D T = 162
I = 156 + 0.15Y - 1,052i i = 0.059
G = 202 M/P = 1.5Y - 8,691i
The IS equation is determined to be Y = 1,697.52 - 3,627.59i.
The LM equation is given as i = 0.059
Furthermore, the equilibrium values of Y, C, I, and the real money supply are calculated as
Y = 1,483
C = 965
I = 316
M/P = 1,712
Suppose that government spending decreases to G = 192.
Determine the equation for the new IS relation.
Y = 1,663.03 - 3627.59 i. (Round your calculations of the constant and the slope term to two decimal places.)
Using the new IS equation following the decrease in government spending, calculate the new equilibrium values of the following:
Y = 1449. (Round your response to the nearest integer.)
C = 946. (Round your response to the nearest integer.)
I = 311.28. (Round your response to two decimal places.)
All of the following statements accurately describe the outcome of a contractionary fiscal policy that involves a decrease in government spending except________.
A. a decrease in government spending decreases real output through the multiplier effect, which in turn decreases the real demand for money.
B. the decrease in real output following a decrease in government spending may not necessarily decrease investment if the central bank pursues an expansionary policy.
C. a decrease in government spending, G, always increases private investment, I.
D. the decrease in real output and income following a decrease in government spending leads to a decrease in consumption, C.
With the government's contractionary fiscal policy, the value of the real money supply becomes 1661. (Round your response to the nearest integer.)
Now suppose the real money supply is fixed at 1712 and government spending still decreases to G = 192. Calculate the new equilibrium values of the following:
Y = (Round your response to the nearest integer.)
C = (Round your response to the nearest integer.)
I = (Round your response to two decimal places.)
Hint: The money market must be in equilibrium so 1712 = 1.5Y - 8,691i and the goods market must be in equilibrium so Y = C + I + G at the same values of Y and i.