Условие:
Consider the following set of equations characterizing the goods and money markets of an economy:
• Consumption: C= c0 + c1(Y→ T ), with 0 < c1 < 1
• Investment: I= b0 + b1Y→ b2ω, with 0 < b1 < 1→ c1, and b2 > 0
• Government Spending: G= G
• Taxes: T= T
• Goods market equilibrium Y= C + I + G
• Interest rate: i= i
• Lending rate: ω= i + x\nwhere x denotes the external finance premium.
(a) Identify the endogenous and exogenous variables. Can you solve the model? If not, complete the model.
(b) Derive the equations of the IS and LM curves assuming that x = 0.
(c) Assume government spending increases with !G. Calculate the government spending multiplier. Compare your result with Exercise 3(c) of Week 1.
(d) Assume government spending and taxes increases with the same amount !G= !T. Calculate the multiplier of the balanced budget operation. Compare your result with Exercise 3(d) of Week 1.
(e) Solve the IS-LM equation system found in Question (b) for the equilibrium level of income. What is the equilibrium level of investment and corresponding cost of bank loans?
(f) Suppose now that firms’ capital drops following a severe slump in stock prices and banks charge an external finance premium x > 0 on loans to firms. How does the cost of bank loans change? How does this a”ect the equilibrium level of income and investment? Explain briefly.
