Question

Just e) f) and g) if possible please

Question 5: The IS-LM model Consider the following IS-LM model: Consumption: C = 200 +0.25YD Investment: I=150 + 0.25Y - 10001 Government spending: G=250 Taxes: T=200 Money demand: L(i,Y)-2Y - 8000 Money supply: Ms /P=1600 (a) Derive the equation for the IS curve. (Hint: You want an equation with Y on the lefthand side and all else on the right) (b) Derive the equation for the LM curve. (Hint: It will be convenient for later use to write this equation with i on the left side and all else on the right) (c) Solve for equilibrium real output. (Hint: Substitute the expression for the interest rate given by the LM equation into the IS equation, and solve for output.) (d) Solve for the equilibrium interest rate. (Hint: Substitute the value you obtained for Y in (c) into either the IS or the LM equation, and solve for i. If your algebra is correct, you should get the same answer from both equations.) (e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding up C, I, and (1) Now, suppose that money supply increases to M/P = 1840. Solve for Y, C, and I, and explain in words the effects of expansionary monetary policy. (g) Set M/P equal to its initial value of 1600. Now, suppose government spending increases to G = 400. Summarize the effects of expansionary fiscal policy on Y, I, and C.

Answer 1

Question 5 The IS-LM model consider the toollowing model? Consumption c= 200 +0.25 YD Investment! I: 150 +0.25 y - 1000 i Govenment spending a = 250 Taxes T = 200 Money demand : L Cij Y) - 2y- 8000 - Money supply: Ms /P = 1600 e Equation of the Is cauce y=etita - y = 200 +0.25Yp +150 +0.25y-1000! '+ 250 heve YD = disposable si come = (-7) - (y-2001 Now, y= 200 +0.25 (Y-200) +150 + 0-25 y - 1000! +250 + 250 2) y = 2007 0:25 Y-50 + 150 +0.25 y-1001 i). th 2) Y - 0.5y = 550- 10001 0.5y + 10o i = 550 -- equation for the LM (muc! Ici, y) = MS/P -> 2y - 80001 - 1600 -- ). e Now from LM equation :- 27-8600i = 1600 =) (2 y- 1600) i 8000 CS Scanned with 0.0002 sy- 02 CamScanner 0002 Sy- 0:2 si

Now subs& futing this value ofi in the Is equation WC getr 0.sy +10001 - 550 - Ois y + 1000(0.0025Y-0.2) – 5 50 - 0sy + 0.25 Y - 200 - 550 -) 0.75 Y = 790 - Y - 75.95 = 1000 Hace equilibuum real out but is 1000 a How e Now, equilibrium C=2 oot 0.25 YD -> C = 200 +0.25(Y-T) substituting y = 1000, T-200 WCHA, C= 200 +0.25 (1000-200) = 400 and equilibuium I = 150 +0.25 Y-1001 Now to find i we substitute y = 1000 in the LM equation. Hurce) { x1000)-80001 - 1600 => 80001 - 400 į -0.05 or solo substituting i=0.05 in I equation we get! I = 150 +0.25 X 100D) -(1000 x0:05) = 150 +250 - 50 350 Now rs Scanned with CamScanner

Now, et Ita =) 400 + 350+ 250 = 100o = equilibuona real out but y . =) (zy- £2 Now, suppose me increases to 1840 Now equation of the LM Canue will ber | 27-800i = 1840 w (27 - 1840) i 8000 -) is 0.00025 Y - 0.23 Now substituling this value in the Is equation we get! 0.5y + 1000 (0.002sY-0.23) -550 =) Oisy +0.25Y - 230 = 550 -) 0.75 y = 780 => y = 1040 Now substituting Y= 1040 in the new LM equation We get? ay - 8000 i = 1840 -) (2x 10401 - 80001 - 1840 240 = 80001 is 0.03 or 3% Now equilibuum c= 200+ 0.25 YO 2) C = 200 +0.25 (Y-T) substituting Y = 1040 and T= 200 we get Scanned with a 200+ 0.25 ( CamScanner = 410

Equilibrium Is 150 +0.25 y - 10001 substituting y = 1040 and i= 0.03 we get! I = 150+ 0.25(1040) -(1000 X 0.03) - 150 + 260 - 30 = 380 Hunce due to expansionary monetay policy, y enreases from 1000 to 1040 i decling from 5% to 3%, e increases from 400 to 4 10 and I increases from 350 to 380. g Now suppose M remains at 1600 but G increases to - 10001 + 400 40. Now Is equation. y=ct Ith - y = 200+ 0.2517-T) + 150+0.25 y-10001 - y = 200 +0:25 y. a) Ois y + lovoi = 700 + 400 ve 200 +0.25 Y -(0.25 x 200) + 1 soto.2sy Now LM equation 24-80001 = 1600 -) i = 0.000 25 Y -012 substituting this value of I in the Is equation we get! 0.5 y + 1000 (0.00025 Y-0.2) -700 - Oisy + 0.25Y - 200 = 700 0.75 Y = 900 CS Scanned mint CamScanner y = 1200

y=1200 in the LM equation low substituting we get! 27-800i = 1600 12X1200) - 8000i = 1600 =) sooi = 800 = i= 0.1 or 10% Now equilibrium c = 200 +0.25 CY-T) substituting y = 1200 and T = 200 we get, C= 200+ 0.25 ( 1200-200) - 450 and equilibrium I - 150+ 0.25 Y - 10001 substituting y=1200 and i=o. we get I = 150 +0. 25 x 1200) -(1000 X 0.19 I = 150+30 - 10 I = 350 Hence, due to enpussionay fiscal policy, y in reass from lovo to 1200, i in neasts from 5% to 10% and annel wear neasis from 400 to 450.