1. Consider the following IS - LM model: C = 200 + 0.25Y, I = 150 + 0.25Y – 1000i G = 250 T - 200 (M/PY - 2Y – 8000i M/P = 1600 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 equations and solve for i. If your algebra is correct, you should get the same answer from both equations.)
1. Consider the following IS - LM model: C = 200 + 0.25Y, I = 150 + 0.25Y – 1000i G = 250 T - 200 (M/PY - 2Y – 8000i M/P = 1600 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 equations and solve for i. If your algebra is correct, you should get the same answer from both equations.)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter5: Business And Economic Forecasting
Section: Chapter Questions
Problem 4E
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