Consider the economy of Hicksonia whoes economy is descibed by an IS-LM mlodel.
ID: 1152743 • Letter: C
Question
Consider the economy of Hicksonia whoes economy is descibed by an IS-LM mlodel. The consumption function is given by: C=300+0.6(Y-T). The investment function is: I=700-80r. Government purchases and taxes are both 500. The money demand function in Hicksonia L(Y,r)=Y-200r. The money supply is (M) 3000 and the price level (P) is 3.
(a) Write the equation of the IS curve. (1 point)
(b) Write the equation of the LM curve. (1 point)
(c) Find the equilibriam intrest rate r and the equilibrium level of the income Y. (1 point)
thankyou
Explanation / Answer
(a) In goods market equilibrium, Y = C + I + G
Y = 300 + 0.6(Y - 500) + 700 - 80r + 500
Y = 1,500 + 0.6Y - 300 - 80r
0.4Y = 1,200 - 80r
Y = 3,000 - 200r.........(Equation, IS curve)
(b) In money market equilibrium, (M/P) = L(r, Y)
3,000/3 = Y - 200r
Y - 200r = 1,000
Y = 1,000 + 200r........[Equation, LM curve]
(c) In general equilibrium, YIS = YLM
3,000 - 200r = 1,000 + 200r
400r = 2,000
r = 5
Y = 3,000 - (200 x 5) = 3,000 - 1,000 = 2,000