Question

2. Assume that the equilibrium in the money market may be described as M/P = 0.5Y...

2. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800. this is one question unfortunately.

  1. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

  1. What is the slope of the LM curve?

  1. If real money balance M/P increases to 1200, what is a new LM curve?

  1. Graphically illustrate LM curve from part a and new LM curve from part c.
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Homework Answers

Answer #1

a.

The LM curev is given as:

M/P = 0.5Y - 100r

800 = 0.5Y - 100r

0.5Y = 800 + 100r

Y = (800/0.5) + (100/0.5)r

Y = 1600 + 200r

It can also be expressed as:

200r = Y - 1600

r = (1/200)Y - (1600/200)

r = 0.005Y - 8

b.

The slope of the LM curve is given by dr/dY = 0.005

c.

M/P = 1200

The new LM curve is:

M/P = 0.5Y - 100r

1200 = 0.5Y - 100r

0.5Y = 1200 + 100r

Y = (1200/0.5) + (100/0.5) r

Y = 2400 + 200r

200r = Y - 2400

r = 0.005Y - 12

Thus, the LM curve is : r = 0.005Y - 12

d.

The old LM curve is r = 0.005Y - 8

The new LM curve is r = 0.005Y - 12

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