Consider the following IS-LM model: C=200+0.25Yd I=150+0.25Y-1000i G=250 T=200 Real Money Demand=M/P=2Y-8000i Real Money Supply=1600 a. Derive the IS relation. b. Derive the LM relation. c. Solve for equilibrium real output and interest rate and show it in a graph, draw IS and LM curves.
Consider the following IS-LM model:
C=200+0.25Yd
I=150+0.25Y-1000i
G=250
T=200
Real Money Demand=M/P=2Y-8000i
Real Money Supply=1600
a. Derive the IS relation.
b. Derive the LM relation.
c. Solve for equilibrium real output and interest rate and show it in a graph, draw IS and LM curves.
d. Solve for values of C, G and I and verify that they add up to Y you obtained in part c.
e. Now suppose that the money supply increases to M/P=1840. Solve for Y, i, C and I and describe in
words the effects of an expansionary
f. Set M/P to its initial value of 1600. Now suppose that government spending increases to G=400.
Summarise the effects of an expansionary fiscal policy on Y, i, C. Use a graph to show the shift in IS
and/or LM.
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