Question

Problem 4: (30 points) The following equations describe an economy (Think of C, I, G etc., as being measured in billions and i' as a percentage; a 6 percent interest rate implies i =6): C = 100+0.75(1-t)Y t=0.2 I= 150 - 301 NX = -100 G = 400 L = 2Y - 80i M B = 1600 a. What is the equation that describes the IS curve? (10 points) b. What is the general definition of the IS curve? (2 points) c. What is the equation that describes the LM curve? (10 points) d. What is the general definition of the LM curve? (2 points) e. What are the equilibrium levels of income and interest rate? (6 points)

Answer 1

Is cuire equation is given by! Y = AD ya C+ I +GA NX equation that describes t-sclave Y = 100+ 0.75 (1 t) + 150-301 + 400 + (-100) Y = 100+ 0.75Y-0.75 (0. 27 + 150-301 + 300 Y = 550+ 0.75% - 0.15% - 301 - 0.44= 550-30 E = 1375 - 751 equation that describes the IS-cwue 2 I-S cwie recreates different combina tions of Interest rate (2) and Income (Y) where goods market is in equilibrium Equlbiium in goods market requviel that aggregate. Output & be equal to agredpite spending (Y=AD). Bago

C.) IM-equation is given by: L = Mle (Money demand - Money supply) 24-80 i = 1600 24 = 1600+ 80 i Yz 800+ 401 aquation that describes LM-cwue. I LM curve represents different combin nations of income and interest rates where, money market is in equilibrium. equlibovum in Money market. Ieguire equatlity of demand for money and supply of money (L = M/ e ist equilibrium, IS = LM ie, both goods and money market are in equilibrium i equation equation ② 1375-75 x = 800+ 4014 575 = Ils 1* - 575 = 5 115 a

pulting value of it in equation y H - 1875 - 25(5) " 2 1375-375 2 1000 2 y Z1000 = 1000/