Question 7. Suppose that in a closed economy, government purchases and taxes are both 100. The consumption function is C= 0.75(Y-TH150. The investment function is I= 250 – 25r. The money demand function in the economy is (M/Pla= Y – 100r. The money supply M is 750 and the price level P is 1.5. a. Derive the equations of IS and LM curves. b. Find the equilibrium interest rate r and the equilibrium level of income Y, given that the price is fixed. c. Derive an equation for the aggregate demand curve in this economy.

Question 7. Suppose that in a closed economy, government purchases and taxes are both 100. The consumption function is C= 0.75(Y-TH150. The investment function is I= 250 – 25r. The money demand function in the economy is (M/Pla= Y – 100r. The money supply M is 750 and the price level P is 1.5. a. Derive the equations of IS and LM curves. b. Find the equilibrium interest rate r and the equilibrium level of income Y, given that the price is fixed. c. Derive an equation for the aggregate demand curve in this economy.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, And Sources Of Business Cycles

Section: Chapter Questions

Problem 11E

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