Question

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

C = 0.8(Y – T)	T = 1,000
I = 800 – 20r	G = 1,000
Y = C + I + G	Ms/P = Md/P = 0.4Y – 40r
Ms = 1,200

a. Write a numerical formula for the IS curve, showing Y as a function of r alone.

b. Write a numerical formula for the LM curve, showing Y as a function of r alone.

c. What are the short-run equilibrium values of Y, r, C, I, private saving, public saving, and national saving?

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Answer 1