2. Suppose you are given the IS-LM model below: (1) C = 120 + 0.8YD (2)...

2. Suppose you are given the IS-LM model below: (1) C = 120 + 0.8YD (2) I = 300 – 2000r (3) G = 500 (4) T = 400 (5) YD = Y – T (6) Ms = 200 (7) Md = 80 + 0.1Y – 2000r

a. Find the equilibrium values of income and the interest rate.

b. Suppose you are again given equations (1) – (7), but equation (7) were to be replaced by: (7’) Md = 80 + 0.1Y Solve for the new equilibrium values of income and the interest rate

c. Using IS-LM, show graphically and discuss how the equilibrium income and interest rate differs when using equation (7’) rather than equation (7). In which case does an increase in government spending have a larger impact on income? Show graph corresponding to question (c):

Expert Solution

Rahul Sunny answered 2 years ago

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