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In this problem, we use our IS and LM equations to derive the aggregate demand curve. Then, given shocks to the money supply and fiscal policy, we consider the effect on the AD curve - which way the AD curve shifts. More Macroeconomics Problems: ___________________________________________________________ Consider the economy of Hicksonia. a. The consumption function is given by: C=200 (Y-T) The investment function is: I=200-25r Government purchases and taxes are both 100. For this economy, graph the IS curve for r changing from 0 to 8 b. The money demand function in Hicksonia is (M/P)^d=Y-100r The nominal money supply is 1000 and the price level P is 2. For this economy, graph the LM curve for r ranging from 0 to 8 c. Find the equilibrium interest rate r and equilibrium level of income Y. d. Suppose that government purchases are raised from 100 to 150. How does the IS curve shift? What are the new equilibrium interest rate and level of income? e. Suppose instead that the money supply is raised from 1000 to 1200. How does the LM curve shift? What are the new equilibrium interest rate and level of income? f. With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rate and level of income? g. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if fiscal or monetary policy changes, as in part (a) and (e)? from Mankiw's Macroeconomics (8th ed) - Aggregate Demand Part 2 (Chapter 12) - Problem 3 ----------------------------------------------------------------
