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In: Economics

1. Consider the following numerical example of the IS-LM model: 25 C = 100 + 0.3YD...

1. Consider the following numerical example of the IS-LM model: 25 C = 100 + 0.3YD I = 150 + 0.2Y - 1000i T = 100 G = 200 i = .01 (M/P)s = 1200 (M/P)d = 2Y - 4000i a. Find the equation for aggregate demand (Y). b. Derive the IS relation. c. Derive the LM relation if the central bank sets an interest rate of 1%. d. Solve for the equilibrium values of output, interest rate, C and I. e. Expansionary monetary policy. Suppose that the central bank increases money supply to 1500. What is the impact of this expansionary monetary policy on the IS and LM curves? Find the new equilibrium values of output, interest rate, C and I. Expansionary fiscal policy. Suppose that the government increases its spending G to 300. What is the impact of this expansionary fiscal policy on the IS and LM curves? Find the new equilibrium values of output, interest rate, C and I.

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Expert Solution

Hi there! Thank you for the question. Since we only answer up to 4 sub-parts. We will answer the first 4. Please resubmit the question and specify the other subparts (up to 4) you would like to be answered.

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Given information-

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Answer (a)

Aggregate demand (AD) is sum of the all the economic components including consumption (C), investment (I), and government expenditure (G).

(1) represents required equation for aggregate demand.

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Answer (b)

The IS curve depicts the goods market equilibrium for different levels of income (Y) and interest rate (i).

For goods market equilibrium,

(2) represents IS relation.

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Answer (c)

The LM curve depicts the money market equilibrium for different levels of income (Y) and interest rate (i).

For money market equilibrium,


(3) represents LM relation.

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Answer (d)

Rahul Sunny answered 8 months ago
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