Assume the Chilean economy can be described as follows: C=200+0.25Yd l=150+0.25Y-1000r G=250 T=200 (M/P)d= L(r, Y) =

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Question:

Assume the Chilean economy can be described as follows:

C=200+0.25Yd

l=150+0.25Y-1000r

G=250

T=200

(M/P)d= L(r, Y) = 2Y- 8000r

Ms=1840

P=1

a) Derive the equation for the LM curve.

( 1 .5 mk)

b) Determine the slope af the LM curve.

(0.5 mark)

c) Derive the equation for the IS curve

(I.S mk)

d) Determine the slope ofthe IS curve.

(0.5 mk)

c) Compute the quilibrium values of income (Y) and interest rate (R)?

(2 marks)

[) Calculate the value of the multiplier

( I mk)

B) Use the IS-LM model to PREDICT the short-run Impact on the INTEREST rate and output if the Bank of Jamaica pushes down interest rates down at same time that both consumption and investment fall duo to a financial crisis. Illustrate your answer graphically.

Bc sure to label: i. the axes; ii. the curves; iii. the initial equilibrium; and iv. tile direction the
curves shift. Explain your answer in words.
(3 marks)