Question

Assume the following equations for the goods and money market of an economy:

C = 250 + .8(Y-T)

I = 100 - 50r

T = G = 100.

Ms = 200

Md = 0.2Y – 100r

a) Write the equation of the IS curve for this economy. Is this upward or downward sloping? The IS curve is written as Y = _ +/- _r. (6 points)

b) If T falls to 50 and everything else remains the same, write the equation of the new IS curve for this economy. (4 points)

c) Draw the S+T, I+G and the IS curves for both parts (a) and (b). Make sure that all intercepts are labeled correctly. (15 points)

d) By how much has the IS curve shifted in part (c)? Does it match up with what is suggested by the multiplier? Show your work. (5 points)

e) Derive the LM curve from the Md and Ms equations given above. Is this upward or downward sloping? The LM curve is written as Y = __ +/-__r. (5 points)

f) Using the equation of the IS curve in part (a) and the LM curve in part (e) find the equilibrium levels of Y, r, M, C, S, I, G and T. (10 points)

g) Using the LM curve in part (e) and the IS curve in part (b), find the equilibrium levels of Y, r, M, C, S, I, G and T. (10 points)

h) Explain the adjustment process from the old to the new equilibrium when (1) at the same r, you have a different Y, and (2) at the same Y, you have a different r. You might find it helpful to draw IS and LM curves for both equilibria first. Use numbers as much as possible. (20 points, 10 points each)

i) Suppose the equation of the new LM curve is Y = 1500 + 500r. State one factor that can change the LM curve this way and be as specific as possible. Compare the new and the old LM curves. (5 points)

j) Using the new LM curve and the IS curve in (b), in other words, both IS and LM have changed. Solve

for the equilibrium levels of Y, r, M, C, S, I, G and T. (10 points)

k) From your answers in part (j), which curve has shifted more? How can you tell? Compare this to the

original equilibrium in part (f). (5 points)

I only need the answer for the i), j), and k) parts! Thanks!

Answer 1

1 100-502 MS 20 (32 giuou ms = md 5

450-to-3 Ly-100)-503 370 to.8y-502 370-50γ 5 Y - 1850-250 IS : Y 185c-2507 850-1soo 850 ア50 5 15 37 1:33

=-夏@o-t-o.8 114(5-1n) 1,508 33. 5

Ισο - 5x1.y 1293 S 3

1:33 Si 1665 1구.