Consider the following IS-LM model: ? = 200 + 0.25?? ? = 150 + 0.25? − 1,000? ? = 250 ? = 200 (?/?)? = 2? − 8,000? ?/? = 1,600 a. Derive the IS relation. (Hint: You want an equation with ? on the left side and everything else on the right.) b. Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equation with ? on the left side and everything else on the right.) c. Solve for equilibrium real output. (Hint: Substitute the expression for the interest rate given by the LM equation into the IS equation and solve for output.)
II. Consider the following IS-LM model:
? = 200 + 0.25??
? = 150 + 0.25? − 1,000?
? = 250
? = 200
(?/?)? = 2? − 8,000?
?/? = 1,600
a. Derive the IS relation. (Hint: You want an equation with ? on the left side and everything
else on the right.)
b. Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equation
with ? on the left side and everything else on the right.)
c. Solve for equilibrium real output. (Hint: Substitute the expression for the interest rate
given by the LM equation into the IS equation and solve for output.)
d. Solve for the equilibrium interest rate. (Hint: Substitute the value you obtained for ? in
part (c) into either the IS or LM equation and solve for ?.)
e. Solve for the equilibrium values of ? and ? and verify the value you obtained for ? by
adding ?, ?, and ?.
f. Now suppose that the money supply increases to ?/? = 1,840. Solve for ?, ?, ?, and ?,
and describe in words the effects of an expansionary monetary policy.
g. Set ?/? equal to its initial value of 1,600. Now suppose that government spending
increases to ? = 400. Summarize the effects of an expansionary fiscal policy on ?, ?, and
?.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
