Suppose an economy is characterized by following equations, Consumption: C = 1000+0.5(Y-T) Investment: I...

 

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Suppose an economy is characterized by following equations, • Consumption: C = 1000+0.5(Y-T) • Investment: I = 500-200r . Government spending: G = 1000 • Taxes: T = 1000 Money demand function: (M/P)=Y - 100r • Money supply M = 400, and price level P = 2 1. Derive IS curve, that is use equilibrium condition in goods market write Y as a function of r. 2. Derive LM curve, that is use equilibrium condition in money market write Y as a function of r. 3. Find equilibrium (ri, Yi*) 4. Draw the IS and LM curves. Label equilibrium (ri, Y) and axes properly Suppose the war is coming, government needs to increase its defensive spending so in- crease taxes by 50%. Answering following question. 5. What happens to IS curve (state it will shift or not)? Derive new IS curve, and draw it in same graph you did in question 4, label new line as IS₂ 6. What about LM curve (state it will shift or not)? Derive new LM curve, and draw it in same graph you did in question 4, label new line as LM₂ 7. Find new equilibrium (2, ₂) and label it in same graph. 1 Suppose an economy is characterized by following equations, • Consumption: C = 1000+0.5(Y-T) • Investment: I = 500-200r . Government spending: G = 1000 • Taxes: T = 1000 Money demand function: (M/P)=Y - 100r • Money supply M = 400, and price level P = 2 1. Derive IS curve, that is use equilibrium condition in goods market write Y as a function of r. 2. Derive LM curve, that is use equilibrium condition in money market write Y as a function of r. 3. Find equilibrium (ri, Yi*) 4. Draw the IS and LM curves. Label equilibrium (ri, Y) and axes properly Suppose the war is coming, government needs to increase its defensive spending so in- crease taxes by 50%. Answering following question. 5. What happens to IS curve (state it will shift or not)? Derive new IS curve, and draw it in same graph you did in question 4, label new line as IS₂ 6. What about LM curve (state it will shift or not)? Derive new LM curve, and draw it in same graph you did in question 4, label new line as LM₂ 7. Find new equilibrium (2, ₂) and label it in same graph. 1

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To derive the IS curve we start with the equilibrium condition in the goods market Y C I G Substituting the given equations for consumption C investme... View the full answer