Product market of an economy is represented by equations C = 550 + 0.7(Y-T), I* = 450-1200i, G is government expenditure, I is tax, Y is national…
BBA Macro Economics · 2023 · Solved Question with Answer
Product market of an economy is represented by equations C = 550 + 0.7(Y-T), I* = 450-1200i, G is government expenditure, I is tax, Y is national income. Similarly, money market of the economy is represented by equations (L = 90 + 0.88Y, Ls = 2410 - 800i, Ms = Rs 4,500 billion, where Li is transaction money demand and Ls is speculative money demand, Y is national income, Ms is money supply and i is interest rate.
a. Derive IS and LM equations and determine equilibrium level of income and interest rate.
b. Determine the new equilibrium situation when central bank decides to decrease money supply by Rs 160 billion.
c. Analyze the effect of change in monetary policy of central bank on national income and rate of interest.