Chapter 5.

IS – LM model

1. Consider a closed economy to which the Keynesian-cross analysis applies. Consumption

is given by the equation C = 200 + 0.7(Y – T). Planned investment is 290, as are
government spending and taxes.
a. What is numerical formula for the planned expenditure curve and the equilibrium output.
If Y is 1,500, How much is planned spending? What is inventory accumulation or
decumulation?
b. How much does equilibrium income change when government spending is reduced to
250? What is the multiplier for government spending? If the government wants to
hold the initial level of equilibrium output, what should the new tax level be to
achieve the target?

2. In the Keynesian cross, assume that the consumption function is given by C = 190 + 0.75
(Y - T ). Planned investment is 100; government purchases is 120 and taxes are 100.
a. What is numerical formula for the planned expenditure curve .What is the equilibrium level
of income?
b. At the level of income is 1600, what is the planned expenditure? What is the level of
accumulation or decumulation?
b. What level of government purchases is needed to achieve an equilibrium income of
1,600?
c. What level of Taxes is needed to achieve an equilibrium income of 1,600?

3. Consider a closed economy to which the Keynesian-cross analysis applies. Consumption

is C = 190 + 0, 8 Yd. I = 140, G = 170, and T = 40
a. What is numerical formula for the planned expenditure curve and the equilibrium level of
income ? If Y = 2500, what is inventory accumulation or decumulation?
b. How much does equilibrium income change when G is increased to 200? What is the
multiplier for government spending?
c. How much does equilibrium income change when T is increased to 50?

4. In the Keynesian cross, assume that the consumption function is given by C = 210 + 0.7
Yd, planned expenditure (I) = 145, Government spending (G) = 180, Tax (T) = 60
a. What is numerical formula for the planned expenditure curve? What is the equilibrium level of
income?
b. If government decreases tax (T) to 50, What is numerical formula for the planned expenditure
curve? What is the equilibrium level of income? What level of government purchases is
needed to achieve an equilibrium income as in question a?

5. Applying IS-LM model to analyze the effect of an increase in tax to real interest rate and
output
6. Applying IS-LM model to analyze the effect of expansionary fiscal policy to real interest rate
and output
7. Applying IS-LM model to analyze the effect of an increase in reserve requirement ratio by
the Central bank to real interest rate and output
8. Applying IS-LM model to analyze the effect of an increase in Net export to real interest rate
and output
9. Applying IS-LM model to analyze the effect of a decrease in discount rate of the Central
Bank to real interest rate and output
10. Applying IS-LM model to analyze the effect of a decrease in cash ratio to real interest rate
and output