Please show your work in detail 11. (5.0 pts) If the IS curve is given by Y = 1,
ID: 1205253 • Letter: P
Question
Please show your work in detail
11.
(5.0 pts) If the IS curve is given by Y = 1,700 – 100r, the money demand function is given by (M/P)d = Y – 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:
Answer:
12. (4.0 pts) Use the information in the previous question to get the equation for the AD, holing M constant at 1000.
Answer:
11.
(5.0 pts) If the IS curve is given by Y = 1,700 – 100r, the money demand function is given by (M/P)d = Y – 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:
Explanation / Answer
(11)
IS: Y = 1700 - 100r .....(1)
Money market is in equilibrium when
(M/P) = MD
1000 / 2 = Y - 100r
Y = 500 + 100r .....(2)
In equilibrium, (1) = (2)
1700 - 100r = 500 + 100r
200r = 1200
r = 6
Y = 1700 - (100 x 6) = 1700 - 600 = 1100
When M = 1200, Money market equilibrium is:
1200 / 2 = Y - 100r
Y = 600 + 100r
Eqyating with IS equation,
600 + 100r = 1700 - 100r
200r = 1100
r = 5.5
Y = 1700 - (100 x 5.5) = 1700 - 550 = 1150
Y increases by (1150 - 1100) = 50
NOTE: First question is answered.