Assume an goods and services market of an economy is characterized by the following equations: C...

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Assume an goods and services market of an economy is characterized by the following equations: C...

Assume an goods and services market of an economy is characterized by the following equations:

C = 0.8 (Y - T) I = 800 -20r Y=C+I+G T = 1000 G = 1000

1. Derive a formula for the IS curve, showing Y as a function of r. The money market for this economy is described by the equations: (M/P) d = 0.4Y - 40r M = 1200 P=1

a) Derive a formula for the LM curve, showing Y as a function of r.

b) What are the short run values of Y and r?

c) What are the short run values of Y and r if G increases by 200? What is the multiplier? Is the value different from what you would get from same change in the Keynesian model? Explain why it is different.

d) Derive a formula for the AD curve, showing Y as a function of P.

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Answer 1

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Assume an goods and services market of an economy is characterized by the following equations: C...

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