Question

C= 0.8(1-t)Y,r=0.25,I=900-50r,G=900,L=0.25Y-62.5r and m/p=500 (money market equilibrium)r=interest rate a) what is the equation that describes the...

C= 0.8(1-t)Y,r=0.25,I=900-50r,G=900,L=0.25Y-62.5r and m/p=500 (money market equilibrium)r=interest rate
a) what is the equation that describes the IS curve
b) define IS curve
c) define LM curve
d) calculate equilibrium levels of income Y and interest rate r

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Answer #1

a) Equation that describes the IS curve :

Y=C+I+G
C=0.8(1-t)Y
t=0.25
C=0.8(1-0.25)Y = 0.8•0.75•Y = 0.6Y
I=900-5i
G=800
Y = 0.6Y+900-5i+800 = 1700+0.6Y-5i
0.4Y=1700-5i
Y=4250-12.5i

b) Define IS curve:

IS: Y=ƒ(i) & ?Y/?i<0 OR i=ƒ(Y)

c) Equation describing LM Curve and Definition of LM curve:

M/P=L
500=0.25Y-62.5i
0.25Y=500+62.5i
Y=2000+250i

LM: Y=ƒ(i) & ?Y/?i>0 OR i=ƒ(Y)

d) calculate equilibrium levels of income Y and interest rate r:

[IS]=[LM]
4250-12.5i=2000+250i
262.5i=2250
i = 2250/262.5 = 60/7 ? 8.57
Y = 4250-12.5i = 29000/7 ? 4'142.86

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