Question

Suppose desired consumption and desired investment are
?? = 300 + 0.75(? − ?) − 300?
T = 100 + 0.2Y
?? = 200 − 200?
G is the level of government purchases and G=600
Money demand is
?? ?
= 0.5? − 500(? + ??)
where the expected rate of inflation, ??, is 0.05. The nominal supply of money M = 133,200.
Suppose the full employment output is 2500 and the price level in the short run is 120.

1) Find the equation for the IS curve.
2) Find the equation for the LM curve.
3) Find the real interest rate and output level in the short run equilibrium [Hint: The short run equilibrium is the intersection of the IS and the LM curve]
4) Find the equation for the aggregate demand curve by using the IS and LM curve. [Hint: Use the form of the LM curve for an unspecified value of P. This aggregate demand function is measured by the solution of (1) and (2).

Answer 1