Question

# 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...

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 and describe in words the effects of an expansionary monetary policy.

7-Set M/P equal to its initial value of 1600. Now suppose that government spending increases to 840. Summarize the effect an expansionary fiscal policy on Y, r and C.

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