Problem 2 (30 points) 1. An economy is characterized by the following behavioral relations: Investment: I...

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Problem 2 (30 points) 1. An economy is characterized by the following behavioral relations: Investment: I = 25(0.5 - i) Consumption: C = 20+.5(Y – T) Money demand: M = = Y(0.5 - i) Policy parameters are initially set at G = 20, T = 20, M = 32. 1. Derive the IS curve (Hint: find the expression for Y on the LHS in terms of i) (6 points) 2. Derive the LM curve (Hint: find the expression for i on the LHS in terms of Y) (6 points) 3. Find equilibrium Y and i. (6 points) 4. Derive and show graphically the effects of an increase in G from 20 to 25. (6 points) 5. Derive and show graphically the effects of an increase in M from 32 to 34. (6 points) Problem 2 (30 points) 1. An economy is characterized by the following behavioral relations: Investment: I = 25(0.5 - i) Consumption: C = 20+.5(Y – T) Money demand: M = = Y(0.5 - i) Policy parameters are initially set at G = 20, T = 20, M = 32. 1. Derive the IS curve (Hint: find the expression for Y on the LHS in terms of i) (6 points) 2. Derive the LM curve (Hint: find the expression for i on the LHS in terms of Y) (6 points) 3. Find equilibrium Y and i. (6 points) 4. Derive and show graphically the effects of an increase in G from 20 to 25. (6 points) 5. Derive and show graphically the effects of an increase in M from 32 to 34. (6 points)

Answer rating: 100% (QA)

1 Deriving the IS Curve The IS curve represents equilibrium in the goods market Investment Consumption Government Spending Output Start with the equil... View the full answer