Suppose that C = 60 + 0.8 Y_D I = 150 - 10r G = 250 T = 200 M^s = 100 M^d = 40 +
ID: 1224468 • Letter: S
Question
Suppose that C = 60 + 0.8 Y_D I = 150 - 10r G = 250 T = 200 M^s = 100 M^d = 40 + 0.1 Y - 10r a. Write the equations for the IS and LM schedules. b. Find the equilibrium values for income (Y_0) and the interest rate (r_0). Suppose we change the model in problem 1 such that investment is assumed to be completely interest inelastic; investment does not depend on the rate of interest and we have I = 150. a. Write the new equations for the IS and LM schedules. Show the schedules graphically. b. Find the new equilibrium values for income and the interest rate.Explanation / Answer
a.IS curve is defined by the equation,
Y=C+I+G
=60+.8YD+150-10r+250
=460+.8YD-10r
.2YD=460-10r
Or,YD=2300-50r
The LM curve is defined by the equation M / P = L ( i , Y ) {display style M/P=L(i,Y)} , where the supply of money is represented as the real amount M/P (as opposed to the nominal amount M), with P representing the price level, and L being the real demand for money,i=interest rate,Y=income.
b.At equilibrium,
Md=Ms
Or,40+.01Y-10r=100
Or,.01Y=60+10r
Or,Y=6000+1000r
Putting value of Y we have,
Md=40+.1(6000+1000r)-10r
=40+600+100r-10r
=640+90r
Or,r0=(Md-640)/90
Putting value of r we have,
Y0=6000+1000[(Md-640)/90]=6000+11.11Md-7111.11=11.11Md-1111.11
2.I am unable to draw any diagram as my system is not supporting.