Assume that the economy is characterized by the following behavioral equations: C = 200 +(0.5)YD, where YD = Y-T I = 150 + 0.25Y - 1000 i T = 200; G = 250 Money supply (M/p)s = 1600 Money demand (M/p)D = 2Y – 8000 i

Assume that the economy is characterized by the following behavioral equations: C = 200 +(0.5)YD, where YD = Y-T I = 150 + 0.25Y - 1000 i T = 200; G = 250 Money supply (M/p)s = 1600 Money demand (M/p)D = 2Y – 8000 i

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter5: Income And Substitution Effects

Section: Chapter Questions

Problem 5.15P

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Question

Assume that the economy is characterized by the following behavioral equations:

C = 200 +(0.5)YD, where YD = Y-T

I = 150 + 0.25Y - 1000 i

T = 200; G = 250

Money supply (M/p)s = 1600

Money demand (M/p)D = 2Y – 8000 i

C is private consumption, Y income, T taxes, I business investment, G government spending, i the interest rate.

(1) Find the equation for aggregate demand (Z)

(2) Derive the IS equation (Hint: Express the equation with Y on the left side and others on the right side)

(3) Derive the LM equation (Express the equation with i on the left side and everything else on the right side)

(4) Find equilibrium real output (Hint: plug the expression for the interest rate given by the LM equation in (3) into the IS equation in (2), and then solve for Y)

(5) Find the equilibrium interest rate (Hint: plug your answer in (4) into the LM equation in (3))

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