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 the price level, P
(D) now suppose that the recent testimony of Janet, Yellen, Chair of the Federal Reserve OMC, changes people's expectations of inflation so that pi^e increases to 0.10. What are the new short-run levels of prices, P, the real interest rate, r, and output, Y?
(e) What are the new long-run levels of prices, P, the real interest rate,r and output, Y?
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