Market Structure Homework Problem #1: The Widget Industry The Widget industry is perfectly competitive.
September 3, 2020
Sue and Missy make pizza and soda. Sue takes 4 hours to brew a gallon of soda and 2 hours to make pizza. Missy takes 6 hours to brew a gallon of soda…
September 3, 2020

The information below describes the current state of the economy for the Kingdom of Westeros. All coefficients (e.g. m0) represent positive constants, and c is bounded between 0 and 1. Assume that inflation is equal to zero.

a. Derive an expression for the LM curve for Westeros. What is the slope of the LM curve? Is it positive or negative?

b. Derive an expression for the IS curve for Westeros. What is the slope of the IS curve? Is it positive or negative?

c. Suppose that there is a balanced budget rule in place in the Kingdom such that ΔG = ΔT (i.e. any increase in spending by Queen Cersei Lannister for war or otherwise must be accompanied by an increase in tax). Would the Kingdom’s output change in response to an increase in government spending? If so, by how much (derive an explicit algebraic expression here)?

2. The intbrrnatinn belmar describes the sin-rent state ct’the e-cnnnm’_l,.r fer the Kingdom cf Westerns. All cnefficients [c.g. mu) represent pnsitive cnnstants, and c is bntmdedbetw— t] and 1. Assume that int’latjnn is equal tn zerc. Realmcneydernand: L[r,1’]=mu+.i;}’—.F:rReal nicney supply: M? = r:IEIICcnsinnptinn: C = Cu + cfi" — T]Gmmment spending: G hlveshnent demand: I = It, — b:- a. Derive an expressicn fur the LM cm’ve fanestern-a ‘What is the slcpe cfthe LMcurve? In it p-nsitive nr negative? b. Derive an expressicn fur the IE cm’ve t’nr Westerns. What is the slcpe cfthe IS curve?Is it punitive cIr negative? c. Suppeae that there is a balanced budget rule in place in the Kingdcm such that at] =1M" [i.e. a111,r increase in spendingb’}r Queen Cersei Lannister f’n-r war cIr ntherw’iaemust he accnmpanied by an increase in tan]. 1|il‘d’nuld the Kingdom’s cutput change inrespnnse tn an increase in gnvernrnent spendingtI It’sn, by hnw much {derive anexplicit algebraic expressinn here]?

KM
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