Section B Answer the question. Provide the detailed derivation for each answer. Consider the IS-LM model, and suppose that the economy of Mermaid Land can be characterised by the following relations (all units are in millions of domestic currency): C = 200+ 0.25(Y-T) I = 150+ 0.25Y - 1000i G = 250 T = 200 d = 2Y 8000i S = 1600 (a) Derive the equation for the IS curve (b) Derive the equation for the LM curve (c) Solve for equilibrium output (d) Determine the equilibrium interest rate (e) Determine equilibrium levels of consumption and investment (f) Check whether C + G + I=Y (g) Following up on question (e), suppose further that the central bank tries to increase the equilibrium real output by increasing the money supply, such that SI = 1840 Solve for the equilibrium real output and interest rate. (h) Do you think the central bank intervention is effective in increasing the equilibrium real output? Explain your answer briefly.
Section B Answer the question. Provide the detailed derivation for each answer. Consider the IS-LM model, and suppose that the economy of Mermaid Land can be characterised by the following relations (all units are in millions of domestic currency): C = 200+ 0.25(Y-T) I = 150+ 0.25Y - 1000i G = 250 T = 200 d = 2Y 8000i S = 1600 (a) Derive the equation for the IS curve (b) Derive the equation for the LM curve (c) Solve for equilibrium output (d) Determine the equilibrium interest rate (e) Determine equilibrium levels of consumption and investment (f) Check whether C + G + I=Y (g) Following up on question (e), suppose further that the central bank tries to increase the equilibrium real output by increasing the money supply, such that SI = 1840 Solve for the equilibrium real output and interest rate. (h) Do you think the central bank intervention is effective in increasing the equilibrium real output? Explain your answer briefly.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Urgently needed Part D E F
Transcribed Image Text:Section B
Answer the question. Provide the detailed derivation for each answer.
Consider the IS-LM model, and suppose that the economy of Mermaid Land can be
characterised by the following relations (all units are in millions of domestic
currency):
C = 200+ 0.25(Y-T)
I = 150+ 0.25Y - 1000i
d
G = 250
T = 200
= 2Y 8000i
S
= 1600
(a) Derive the equation for the IS curve
(b) Derive the equation for the LM curve
(c) Solve for equilibrium output
(d) Determine the equilibrium interest rate
(e) Determine equilibrium levels of consumption and investment
(f) Check whether C + G + I=Y
(g) Following up on question (e), suppose further that the central bank tries to
increase the equilibrium real output by increasing the money supply, such that
SI
= 1840
Solve for the equilibrium real output and interest rate.
(h) Do you think the central bank intervention is effective in increasing the
equilibrium real output? Explain your answer briefly.
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