(a). The IS curve is given by Y= C ( Y-T) + I (i) +
G
We can plug in the consumption and investment functions and values for G and T as given in the
question and then rearrange to solve for the IS curve for this economy.
Y =(200+ 0.75) (Y −100) +200−25i +100
Y −0.75 Y =425−25 i
(1−0.75 Y )=425−25i
1
(0.25
Y= (425−25i )
Y =1700−100 i
The IS equation is graphed in Figure for I ranging from 0 to 8
(b). The LM curve is determined by equating the demand for and supply of real money balances.
1000
The supply of real balance is =500 . Setting this equal to money demand, It is calculated as;
2
500=Y −100 i
Y =500+100 i
The LM curve is graphed in Figure 11-11 for I from 0 to 8
(c). If you take the price level as given, then the IS curve and the LM equations gives two equations
in two unknowns, Y and I. The below equation was found in part (a) and (b);
IS : Y =1700−100 i
LM : Y =500+100i
By equating the above equation, the value of i can be solved as
1700−100 i=500+100 i
1200=200 i
i=6
Given the value of i, the value of Y can be solved by substituting it into either the IS or the LM equation;
Y =1100
Therefore, the equilibrium interest rate is 6 percent and the equilibrium level of output is 1100, as
depicted in Figure
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, (d). If the government purchases increase from 100 to 150, then the IS equation
Y =200+ 0.75 (Y −100)+200−25i +150
By simplifying;
Y =1900−100 i
The IS curve is graphed as IS2 in Figure, the IS curve shifts to the right by 200
By equating the new curve IS curve with the LM curve derived in part (b) , the new equilibrium interest
rate will be;
1900−100 i=500+100 i
1400=200 i
i=7
The value of i can be substituted into either IS or the LM equation to find the new level of output;
Y =1200
Therefore, the increase in government purchases causes the equilibrium interest rate to raise from 6
percent to 7 percent, while the output increases from 1100 to 1200. This is depicted in the figure.
(e). If the money supply increases from 1000 to 1200, then the LM equation becomes;
1200
=Y −100 i
2
Or
Y =600+100 i
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G
We can plug in the consumption and investment functions and values for G and T as given in the
question and then rearrange to solve for the IS curve for this economy.
Y =(200+ 0.75) (Y −100) +200−25i +100
Y −0.75 Y =425−25 i
(1−0.75 Y )=425−25i
1
(0.25
Y= (425−25i )
Y =1700−100 i
The IS equation is graphed in Figure for I ranging from 0 to 8
(b). The LM curve is determined by equating the demand for and supply of real money balances.
1000
The supply of real balance is =500 . Setting this equal to money demand, It is calculated as;
2
500=Y −100 i
Y =500+100 i
The LM curve is graphed in Figure 11-11 for I from 0 to 8
(c). If you take the price level as given, then the IS curve and the LM equations gives two equations
in two unknowns, Y and I. The below equation was found in part (a) and (b);
IS : Y =1700−100 i
LM : Y =500+100i
By equating the above equation, the value of i can be solved as
1700−100 i=500+100 i
1200=200 i
i=6
Given the value of i, the value of Y can be solved by substituting it into either the IS or the LM equation;
Y =1100
Therefore, the equilibrium interest rate is 6 percent and the equilibrium level of output is 1100, as
depicted in Figure
This study source was downloaded by 100000856941565 from CourseHero.com on 11-22-2022 05:02:22 GMT -
https://www.coursehero.com/file/157866806/econ-
, (d). If the government purchases increase from 100 to 150, then the IS equation
Y =200+ 0.75 (Y −100)+200−25i +150
By simplifying;
Y =1900−100 i
The IS curve is graphed as IS2 in Figure, the IS curve shifts to the right by 200
By equating the new curve IS curve with the LM curve derived in part (b) , the new equilibrium interest
rate will be;
1900−100 i=500+100 i
1400=200 i
i=7
The value of i can be substituted into either IS or the LM equation to find the new level of output;
Y =1200
Therefore, the increase in government purchases causes the equilibrium interest rate to raise from 6
percent to 7 percent, while the output increases from 1100 to 1200. This is depicted in the figure.
(e). If the money supply increases from 1000 to 1200, then the LM equation becomes;
1200
=Y −100 i
2
Or
Y =600+100 i
This study source was downloaded by 100000856941565 from CourseHero.com on 11-22-2022 05:02:22 GMT -
https://www.coursehero.com/file/157866806/econ-
