Macroeconomics   (Midterm)

1. You are given the following information about an economy:

C= 200 + 0.6 (Y-T)                        (M/P)= 0.2Y+500-50i

I = 500 - 100i                               P=1

G=300, T=400                               M=700

a) What is the equation that describes IS curve?

b) What is the equation that describes LM curve?

c) Calculate the equilibrium values of income and the interest rate.

d) If government expenditure doubled, what will the income and interest rate be in the new equilibrium?

2. a) Derive and explain IS curve and give an example how it shifts?

    b) Derive and explain LM curve and give an example how it shifts?

3. a) Show and explain the equilibrium in the goods and money market?

    b) Suppose the government increased its expenditure. Show and explain the crowding out effects here.

4. Show and explain fiscal expansion under the Keynesian Case and under the Classical Case.