Question

C=200 + 0.25(Y-T)

I=150 + 0.25Y- 1000r

G= 250

T=200

(M/P)d=2Y-8000r

M/P=1600

1-Suppose that the government increases G to 400. What are the new level of r and Y? *

2-The equilibrium levels of Y and r are *

3-The equation of IS curve is

4-At equilibrium the values of consumption (c) and investment (I) are *

5-The equation of LM curve is

Answer 1

1.

C = 200 + 0.25(Y-T)

I = 150 + 0.25Y - 1000r

G = 400

T = 200

Thus, the new IS curve is:

Y = C + I + G

Y = 200 + 0.25(Y-200) + 150 + 0.25Y - 1000r + 400

Y = 200 + 0.25Y - 50 + 150 + 0.25Y - 1000r + 400

Y = 0.25Y + 0.25Y + (200-50+150+400) - 1000r

Y - 0.5Y = 700 - 1000r

Y = 1400 - 2000r

The LM curve is:

(M/P)d = M/P

2Y - 8000r = 1600

Y = 800 + 4000r

Thus, equilibrium is given by IS = LM

1400 - 2000r = 800 + 4000r

6000r = 600

r = 0.1

Y = 800 +4000*0.1

Y = 1200

Thus, the equilibrium r = 0.1 and Y is 1200

2.

Assuming G = 400, the equilibrium r = 0.1 and Y is 1200

3.

The IS curve equation with G= 400 is Y = 1400 - 2000r

4.

At equilibrium with G=400, the equilibrium value of consumption is C = 200 + 0.25(Y-T) = 200 + 0.25*(1200-200)

=200 + 0.25*1000

=200 +250

=450

Equilibrium level of Investment I = 150 + 0.25Y- 1000r

=150 + 0.25*1200 - 1000*0.1

=150 + 300 -100

=350

5.

The equation for LM curve is:

The LM curve is:

(M/P)d = M/P

2Y - 8000r = 1600

Y = 800 + 4000r