Question

IS: Y = 7000 + 2.5*G – 1.5*T – 500*r

LM: r = [Y – 5*(MS/P)]/500

1. The AD curve of this economy, as a function of G, T, MS and P
is

[HINT: Note that you’ll get rid of the “500” in the denominator of
the LM curve since when you plug r from the LM curve into the IS
curve, you’ll have 500/500, which equals 1. Solve for Y]

(a) Y = 7500 + 2.5*G – 1.5*T + 5*MS/P

(b) 7000 + 2.5*G – 1.5*T + 5*MS/P = 0

(c) Y = -3500 – 1.25*G + 0.75*T – 2.5*MS/P

(d) Y = 3500 + 1.25*G – 0.75*T + 2.5*MS/P

Answer #1

The correct answer is **(d) Y = 3500 + 1.25*G – 0.75*T +
2.5*MS/P**

Given: Y = 7000 + 2.5*G – 1.5*T – 500*r ------IS curve

r = [Y – 5*(MS/P)]/500 --------------LM Curve

AD curve shows the combination of Y and P at which Both Goods and Money market is in equilibrium.

Hence We have to find Y in terms of P and considering G , T and MS be exogenous variables. We have:

Y = 7000 + 2.5*G – 1.5*T – 500*r

and r = [Y – 5*(MS/P)]/500

=> Y = 7000 + 2.5*G – 1.5*T – 500*r = 7000 + 2.5*G – 1.5*T – 500*[Y – 5*(MS/P)]/500

=> Y = 7000 + 2.5*G – 1.5*T - [Y – 5*(MS/P)]

=> Y = (1/2)(7000 + 2.5*G – 1.5*T + 5*(MS/P))

=> Y = 3500 + 1.25G - 0.75T + 2.5(MS/P)----------AD Curve equation.

Hence, the correct answer is (d) Y = 3500 + 1.25*G – 0.75*T + 2.5*MS/P

C= 0.8(1-t)Y,r=0.25,I=900-50r,G=900,L=0.25Y-62.5r and
m/p=500 (money market equilibrium)r=interest rate
a) what is the equation that describes the IS curve
b) define IS curve
c) define LM curve
d) calculate equilibrium levels of income Y and interest rate r

Assume the economy is described by the following:
Y=3,000
C=200+0.9(Y-T)
I=400-40r
G=T=500
R=5
NX=400-400e
Solve for net exports and the real exchange rate.

Consider the following Keynesian (short-run) model along with
the Classical (long-run) model of the economy.
Labor Supply: Le = 11
Capital Supply: K=11
Production Function:
Y-10K.3(Le).7
Depreciation Rate: &=.1
Consumption Function: C=12+.6Yd
Investment Function: I= 25-50r
Government Spending: G=20
Tax Collections: T=20
Money Demand Function: Ld=
2Y-200r
Money Supply: M=360
Price Level: P=2
Find an expression for the IS curve and plot it.
Find an expression for the LM curve and plot it.
Find the short run equilibrium level of...

3. Using the following information about the current
economy:
C = 130 + 0.80(Y-T) where: C: consumption, Y: output
I = 680 -1200r T: taxes, I: Investment, r: real interest rate
T = 70 G: government
G = 110
(M/P) d = 0.6Y – 960r where: (M/P) d : money demand
Ms = 2364 Ms: money supply
P = 1.0 P: price level
(You must show the steps to derive these answers.)
a. Derive the equation for the IS curve...

1. Consider an economy with the given equations.
Y=C+I+GY=C+I+G
C=112+0.6(Y−T)C=112+0.6(Y−T)
I=120−10rI=120−10r
(MP)d=Y−15r(MP)d=Y−15r
G=$35G=$35
T=$45T=$45
M=$1200M=$1200
P=3.0
a. Use the relevant set of equations to derive the IS curve and
graph it.
b. What is the equation for the IS curve?
Y =
c. Use the relevant set of equations to derive
the LM curve.
d. Calculate the equilibrium level of income (Y) and
the equilibrium interest rate (r).
Y=
r (%)=
e. Use the relevant set of equations to derive...

Consider an economy described by the following
equations:
Y=C+I+G+NX,
Y=8,000
G=2,500
T=2,000
C=500 +
0.75(Y−T)
I=900−50r
NX=1,500−250ϵ
r=r∗=8.
a.
In this economy, solve for private saving, public saving, national
saving, investment, the trade balance, and the equilibrium exchange
rate.
b.
Suppose now that G is cut to 2,000. Solve for private saving,
public saving, national saving, investment, the trade balance, and
the equilibrium exchange rate. Explain what you find.
c.
Now suppose that the world interest rate falls from 8...

Let the money demand function be: L(r,Y) = 50 - 25r + 5Y
the consumption function be : C = 10 + 0.5(Y-T)
and the investment function be: I = 17 - r
where T denotes taxes, G denotes government expenditures, P
denotes the price level and MS denotes the money supply.
Suppose T = 10, G = 5, P = 2, and MS =
500.
In this economy
1. Public Savings equal
2. Private Savings equal
3. Output is equal...

An economy is initially described by the following
equations:
C = 500 + 0.75(Y - T); I = 1000 - 50r; M/P = Y - 200r;
G = 1000; T = 1000; M = 6000; P = 2;
where Y is income, C is consumption, I is investment, G is
government spending, T is taxes, r is the
real interest rate, M is the money supply, and P is the price
level.
a. Derive the IS equation and the LM...

Consider an economy that is described by the following
equations: C^d= 300+0.75(Y-T)-300r T= 100+0.2Y I^d= 200-200r
L=0.5Y-500i Y=2500; G=600; M=133,200; Pi^e=0.05. (Pi being the
actual greek pi letter sign). Please solve part D and E
(a) obtain the equation of the IS curve
(b) obtain the equation of the LM curve for a general price
level, P
(c) assume that the economy is initially in a long-run (or
general) equilibrium (i.e. Y=Y). Solve for the real interest rate
r, and...

Consider the following IS-LM model:
C=400+0.25YD
I=300+0.25Y-1500r
G=600
T=400
(M/P)D=2Y-1200r
(M/P)=3000
1-Derive the IS relation with Y on the left-hand side.
2-Derive the LM relation with r on the left-hand side.
3-Solve for equilibrium real output.
4-Solve for the equilibrium interest rate.
5-Solve for the equilibrium values of C, and I, and verify the
value you obtained for Y adding C, I and G.
6-Now suppose that the money supply increases to M/P=4320. Solve
for Y, r, C and I...

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