4) In a money market equilibrium diagram, show the effect of an increase in real

4) In a money market equilibrium diagram, show the effect of an increase in real money demand, i.e., an increase in L function for any value of i, on the nominal interest rate.
5) a) Suppose there is an increase in consumer optimism about the future (often called an increase in consumer confidence). What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS-LM diagram. What is the effect on output and the interest rate?
b) Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the increase in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the increase in confidence and the Federal Reserve policy? How is consumption affected?
6) Consider the following IS-LM model:
I = 150 + 0.25Y -1000i
G = 250
T = 200
a. Derive the IS relation.
b. Derive the LM relation.
c. Solve for the equilibrium real output.
d. Solve for the equilibrium interest rate.
e. Solve for the equilibrium values of C and I and verify the value you obtained for Y by adding up C, I, and G.
f. Now suppose that the money supply increases to . Solve for Y, i, C, and I, and describe in words the effects of an expansionary monetary policy.
g. Set equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, i, and C.
7) Suggest a policy mix to achieve the following objectives:
a. Increase Y while keeping i constant.
b. Decrease the fiscal deficit while keeping Y constant. What happens to i? To investment?
8) Consider the economy of Hicksonia.
a. The consumption function is given by
C = 200 + 0.75(Y-T)
The investment function is
I = 200 – 25i
Government purchases and taxes are both 100. For this economy, graph the IS curve for i ranging from 0 to 8. Is the Government running a surplus or a deficit (or neither)?
b. The money demand function in Hicksonia is
The money supply M is 1,000 and the price level P is 2. For this economy, graph the LM curve for i ranging from 0 to 8.
c. Find the equilibrium interest rate i and the equilibrium level of income Y.
d. Suppose that the government purchases are raised from 100 to 150. How much 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 1,000 to 1,200. How much 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?
9) There are three groups in a community. Their demand curves for public television in hours of programming, T, are given respectively by
W1 = $200 – T,
W2 = $240 – 2T,
W3 = $320 – 2T.
Suppose public television is a pure public good that can be produced at a constant marginal cost of $200 per hour.
a.What is the efficient number of hours of public television?
b.How much public television would a competitive private market provide?

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