Question

Assume the following model of the economy, with the price level fixed at 1.0:

C = 0.6(Y – T)

T = 40

I = 120 – 30r

G = 40

Y = C + I + G

Ms/P = Md/P = 2Y – 50r

Ms = 280

1. Write a numerical formula for the IS curve, showing Y as a function of r alone. (Hint: Substitute out C, I, G, and T.)
2. Write a numerical formula for the LM curve, showing Y as a function of r alone.                 (Hint: Substitute out M/P.)
3. What are the short-run equilibrium values of Y, r, Y – T, C, I, private saving, public saving, and national saving? Check by ensuring that C + I + G = Y and national saving equals I.Depict your answers in a relevant diagram.                                           
4. Suppose the money supply MS is increased to 480. What are the new values of Y, and r?)                                                                           

Answer 1