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Num IS LM

1. The document contains 5 multiple choice questions related to equilibrium income levels in hypothetical economies. The questions provide consumption, investment, money supply and other relations to calculate the equilibrium income. 2. The first question calculates equilibrium income as 2,284 by setting the IS and LM curves equal using the given relations for money demand, money supply and income. 3. The second question similarly calculates equilibrium income as 800 by setting the IS and LM curves equal using the consumption, investment, money demand and money supply relations provided. 4. The remaining questions follow the same process of setting the IS and LM curves equal to solve for the equilibrium income level using the economic relations provided in the individual questions.

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Vipul Aggarwal
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75 views

Num IS LM

1. The document contains 5 multiple choice questions related to equilibrium income levels in hypothetical economies. The questions provide consumption, investment, money supply and other relations to calculate the equilibrium income. 2. The first question calculates equilibrium income as 2,284 by setting the IS and LM curves equal using the given relations for money demand, money supply and income. 3. The second question similarly calculates equilibrium income as 800 by setting the IS and LM curves equal using the consumption, investment, money demand and money supply relations provided. 4. The remaining questions follow the same process of setting the IS and LM curves equal to solve for the equilibrium income level using the economic relations provided in the individual questions.

Uploaded by

Vipul Aggarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

1.

In the hypothetical economy,


IS curve is = 2,500 – 40i = Y
Transaction demand for money = 0.25Y
Speculative demand for money = 450 – 50i
Money supply = 750
The value of equilibrium income is:
a. 2,462
b. 2,557
c. 2,325
d. 2,284
e. 2,175.
2. In a two sector economy,
Suppose C = 60 + 0.80Y,
I = 116 – 2i,
L = 0.20Y – 5i and
M = 120.
The value of income is:
a. 750
b. 720
c. 830
d. 800
e. 825.
3. The equilibrium level of income is:
C = 120 + 0.6Y
I = 150 – 80i
Ms = 300
Mt = 0.3Y
Ma = 120 – 160i
a. 655
b. 648
c. 662
d. 671
e. 640.
The following relations have been estimated for an economy:
C = 75 + 0.80 Yd consumption
Yd = Y – T disposable income
T = 0.15Y tax function
I = 150 – 16i investment function
G = 31 exogenous government expenditure
Md = 80Y – 2400i demand for money function
Ms = 3,200 exogenous money supply
4. The Budget surplus of the government is:
a. 18.6
b. 17.25
c. 16.7
d. 18.5
e. 17.75.
5. The value of equilibrium income when the government expenditure increases to 63 is:
a. 375.40
b. 342.45
c. 362.50
d. 358.40
e. 365.75.
1. (d) LM Curve
Demand for Money (Md)
= Transaction demand for money + Speculative demand for money
= 0.25Y + 450 – 50i
In equilibrium position:
Money Supply = Money Demanded 750 = 0.25Y + 450 – 50i
300 + 50i = 0.25Y
1,200 + 200 i =Y
Equating LM and IS functions:
2,500 – 40i = 1,200 + 200i
1,300 = 240i
i = 5.42
Y = 1,200 + (200 X 5.42) = 2,284.

2. (d) The IS equation = Y = C + I


Y = 60 + 0.80Y + 116 – 2i, 0.2Y = 176 – 2i
i = –0.10Y + 88
The LM equation = M = L
= 0.20Y – 5i
5i = 0.20Y – 120, i = 0.04Y – 24
The simultaneous equilibrium for IS and LM is;
– 0.10Y + 88 = 0.04Y – 24
So, Y = 800 and i = 8%.

3. (a)
Y = 120 + 0.6Y + 150 – 80i; Y = 270 + 0.6Y – 80i
Y – 0.6Y = 270 – 80i
Y = 675 – 200i (i)
The equation of the LM Curve is Ms = Md; [Md = Ma+Mt]
300 = 0.3Y + 120 – 160i
Y = 600 + 533.33i (ii)
Putting the value of Y in equation (i), we have:
675 – 200i = 600 + 533.33i
733.33i = 75
i= 75
733.33
i = 0.10%
Y = 675 – 200 X 0.10 = 655.

4. e.
Y =C+I+G (1)
Where,
C = Consumption function I = Investment function
G = Exogenous government expenditure and the estimated relations for an economy
C = 75 + 0.80 Yd
d
Y =Y–TT = 0.15Y
I = 150 – 16i
G = 31
Md = 80Y – 2,400i Ms = 3,200
Substituting C, I and T values in equation (1) we get Y = 75 + 0.80(Y – 0.15Y) + 150 – 16i +
31
= 75 + 0.80Y – 0.12Y + 150 – 16i + 31 Y(1 – 0.68) = 256 – 16i
0.32Y = 256 – 16i
Y = 800 – 50i (2)
At equilibrium:
Md = Ms
80Y – 2,400i = 3,200
Substituting the value of Y in equation (2) 80 (800 – 50i) – 2,400i = 320
64,000 – 4,000i – 2,400i = 3,200
6,400i = 60,800
i = 9.5
By substituting the value of i in equation (2) we get the equilibrium level of income Y =
800 – 50(9.5) = 800 – 475 = 325
Once the equilibrium level of income is found out the other variables can be estimated: T =
0.15 Y = 15/100 x 325 = 48.75
Budget surplus of the government = T – G = 48.75 – 31 = 17.75
Budget surplus of the government is 17.75.

5.(c) Y =C+I+G
When the government expenditure increases to 63, Y = 75 + 0.80(Y – 0.15Y) + 150 – 16i +
63
Y = 75 + 0.80Y – 0.12Y + 150 + 16i + 63 0.32Y = 288 – 16i
Y = 900 – 50i (1)
At equilibrium:
Md = Ms
80 Y – 2,400i = 3,200
Substituting the value of Y i.e., equation (1), we get 80 (900 – 50i) – 2,400i = 3,200
72,000 – 4,000i – 2,400i = 3,200
72,000 – 6,400i = 3,200
6,400i = 68,800
i = 10.75
By substituting the value of i in equation (1) we get Y = 900 – 50 (10.75)
= 900 – 537.5 = 362.50
The equilibrium income will be 362.50.

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