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In: Economics

18. Consider the following closed economy: C = 60 +0.8(Y-T) I = 150-1000i G = 250...

18. Consider the following closed economy:

C = 60 +0.8(Y-T)

I = 150-1000i

G = 250

T = 200

Ms/P = 100

Md/P = 40+0.1Y-1000i

a. Derive the IS and LM functions.

b. Find the equilibrium interest rate and the equilibrium level of income.

c. Suppose we change this model such that investment is assumed to be completely interest inelastic: that is, investment does not depend on the rate of interest or we have I=150. Write the new equations for the IS and LM schedules and illustrate them graphically. What is the new equilibrium value of income?

d. How would an increase in money stock affect equilibrium values of Y and i under (c) above? Illustrate and explain your answer.

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Expert Solution

Rahul Sunny answered 1 year ago
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