Consider the following short-run, closed economy model of the economy. Goods Market C = XXXXXXXXXXY – T) I = 150 – 10r ; NX = -200 G = 150 ; T = 100 Money Market M = 20,000 P = 100 L(Y, r) = Y – 50r...

Consider the following short-run, closed economy model of the economy.

Goods Market

C = 50 + 0.5(Y – T)

I = 150 – 10r ; NX = -200

G = 150 ; T = 100

Money Market

M = 20,000

P = 100

L(Y, r) = Y – 50r

1. Find the equilibrium values of r and y. *** This has been answered***

Goods Market = 600 - 20r

Money Market = 200 + 50r

equilibrium value of r = 5.71; Y = 485.8

Policymakers plan to balance the budget by decreasing G. What is the size of the Keynesian-Cross government spending multiplier and the horizontal shift of the IS curve? What are the resulting IS-LM equilibrium values of r and Y after the shift? What is the size of the effective (actual) government spending multiplier? Why is it smaller?