Question

The IS and LM curves for the economy have the following equations: Y = k (Ap - 50 i)

Y = 2(Ms / P) + 100 i

where k = 2, Ap = 4000, Ms = 3000 and P =1

Find the equilibrium level of income and the equilibrium interest rate. Complete following table which represents points on aggregate demand curve.

Price Interest Rate Real GDP

.8 __________

1 _______________________

1.5 ____________

2.0 _____________

Answer 1

Page 1 O f IS: Y = K (Ap- soi) LM: Y: 2 M P + loo e putting the values for R, Ap, MS and taking - 1 at equilibreuim, IS = LM . egn. 1 = egn (2) k (Ap - 5094 = 2 (Ms /D) + 100* 2 (4000 - 5099-2(3000/1 )+100 8000 - 1001 - 6000 + 1007% 2001 2000 2000 - 10 butting value of equilibrium die it in egn. B. Y- K oso (10) a 4000-500] 2 2 X 3500 - 7000 Equilibrium level of income tooo Conds) Equilibrium level of interest rate 10

Page 2 & IS: Y = Cap-50 :) LM: Y 22 (Ms / P) + 100%. ③ With P=0.8. of equubelium IS-LM K(Ap-soi) = 2(Ms /P) + 100". 2 (84000 -501) - 23000/-8)+loo 8000 - 100î = 7500 + 100 -1. 200 = Soo putting value of i in egn. ①. Y = 2 [4000 - 50 (2-5)] 2 (4000 - 125) 27750 3 With P - 1 Y7000 - with P = 1.5 at equilibuiu Mare)+ 1001 KC Ap-50i = 2(Ms / P + 1001

lage-31 2C4000-501):9(8000/15) 100 9000 - 1001 - 4000 41001 2ooi = 4000 i - 40001 - 20 i -20 putting value of i in een o y=9[4000-50 (20)] 1000] 2254ooo 2x3000 ? 6000 - M 6000 with P=2 at equilibrium, 35-LM. KC Ap-Boi) a Cms /p) + 1002 9 [4000-509) - 2 (20009) Hoody 8000 - 1001 - 3000 + tool 5000 - 2002 î 3 500 295 200

Page 4 -i-25 putting value of I in een 0. Y = 2 [4000 - 5o (25)] 3a 14000 - 1250) 2 2x 2750 2 5500 1 Y=5500 Completing the table using results of Interest rate Real GDP. 2.5 7750 70oo 0 000 5500 90 % 25