Question

Consider the following national-income model (with taxes ignored):

Y−C(Y)−I(i)−G0=0kY+L(i)−Ms0=0(0(a) is the first equation in the nature of an equilibrium condition?
(b) What is the total quantity demanded for money in this model?
(c) Analyze the comparative statics of the model when money supply changes (monetary policy) and when government expenditure changes (fiscal policy).

Answer 1

The first equation represents the equilibrium condition in this national-income model. The total quantity demanded for money is determined by the level of output and interest rate. Changes in monetary and fiscal policies affect the equilibrium level of output.

Step-by-step explanation:

Equilibrium Conditions:

The first equation is in the nature of an equilibrium condition. In this national-income model, the first equation, Y−C(Y)−I(i)−G0=0, represents the equilibrium condition where total output (Y) is equal to total consumption (C), investment (I), and government spending (G).

Total Quantity Demanded for Money:

In this model, the total quantity demanded for money is represented by the second equation, Ms0=0. The quantity of money demanded is determined by the level of output (Y) and the interest rate (i).

Comparative Statics:

When the money supply changes (monetary policy), it would affect the equilibrium level of output and interest rate. An increase in the money supply would lead to a decrease in the interest rate and an increase in the equilibrium level of output. On the other hand, when government expenditure changes (fiscal policy), it directly affects the equilibrium level of output. An increase in government expenditure would lead to an increase in the equilibrium level of output.