ECO308W Intermediate Macroeconomics Name:
Dr. Schmidt Spring 2019
Quiz #4: IS-LM Equilibrium
The US Macro economy is represented by the following equations:
Financial Sector:
L = Md/P = 0.5Y – 50i Ms/P = 2000
Real Sector:
AD = C+I+G C = 600 + 0.8YD G = 800 I = 400 – 40i TA = 0.25Y
TR = 250 YD = Y–TA+TR
Set up the IS relationship (2 points)
Step 1, convert C to a function of Y; step 2, set AD = C+I+G; step 3, derive IS relation setting Y = AD and solving for Y (note, you are setting up the equation, you can’t solve for i and y until you have the LM curve).
Set up the LM relationship (2 points)
Solve for equilibrium Y and i using the IS and LM relations (2).
If the FED increases the money supply (Ms/P) to 2200, then find the new equilibrium values for Y and i (2).
Find the value of Investment (I) for each equilibrium solution (2).
According to the question:
L = Md/P = 0.5 Y -50i
Ms/P =200
AD = C+I+G
C= 600+0.8 Yd
I = 400-40i
G=800
Yd = Y -TA+TR
TA =0.25Y
TR=250
a) IS Market -
AD=Y = 600+0.8 Yd + 800+ 400-40i
Y = 600+0.8 (Y -TA+TR) + 800+ 400-40i
Y = 600+0.8 (Y -0.25Y+250) + 800+ 400-40i
Y = 1800 + 0.6Y +200-40i
Y -0.6Y= 2000 -40i
Y = (2000-40i)/0.4
Y = 5000 - 100i
b) LM Market
L = Md/P = 0.5 Y -50i = Ms/P =200
0.5 Y -50i = 200
0.5 Y = 200+50i
Y = 400 +100i
c) Equilibrium : AD= AS
5000 -100i = 400+100i
4600 = 200i
i=23
Y = 2700
d)
LM Market
L = Md/P = 0.5 Y -50i = Ms/P =220
0.5 Y -50i = 220
0.5 Y = 220+50i
Y = 440+100i
Equilibrium : AD= AS
5000 -100i = 440+100i
4560 = 200i
i=22.8
Y = 2680
e)I = 400-40i
i =23
I = 400-40*23
I=460-920
I= -460
i =22.8
I = 400-40*22.8
I=460-9!2
I= -452
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