II. Consider the following IS-LM model: C = 200 + 0.25Y, I = 150 + 0.25Y – 1,000i G = 250 T = 200 (M/P)ª = 2Y – 8,000i M/P = 1,600 a. Derive the IS relation. (Hint: You want an equation with Y 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 i 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: C = 200 + 0.25Y, I = 150 + 0.25Y – 1,000i G = 250 T = 200 (M/P)ª = 2Y – 8,000i M/P = 1,600 a. Derive the IS relation. (Hint: You want an equation with Y 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 i 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.)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
part a, b, c
Transcribed Image Text:II. Consider the following IS-LM model:
C = 200 + 0.25Y,
I = 150 + 0.25Y – 1,000i
G = 250
T = 200
(M/P)ª = 2Y – 8,000i
M/P = 1,600
a. Derive the IS relation. (Hint: You want an equation with Y 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 i 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 Y in
part (c) into either the IS or LM equation and solve for i.)
e. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by
adding C, I, and G.
f. Now suppose that the money supply increases to M/P = 1,840. Solve for Y, i, C, and I,
and describe in words the effects of an expansionary monetary policy.
g. Set M/P equal to its initial value of 1,600. Now suppose that government spending
increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, i, and
С.
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