Tuesday

September 2, 2014

September 2, 2014

Posted by **yaw** on Monday, August 16, 2010 at 11:07pm.

are measured in billions of dollars and r is measured in percent; for example, r = 10

C=170+0.6(Y-T),T=200,I=100-4r,G=350

(M/P)d=L=0.75Y-6r, (M/P)s=735

a. Derive the equation for the IS curve (Hint: It is easier to solve for real output Y here)

b. Derive the equation for the LM curve (Hint: Again, it is easier to solve for real output

Y here)

c. Now express both the IS and LM equations in terms of r. Draw both curves and

calculate their slopes.

d. Use the equations from Parts a and b to calculate the equilibrium levels of real output Y,

the interest rate r, planned investment I, and consumption C.

e. At the equilibrium level of real output Y, calculate the value of the government budget

surplus.

f. Suppose that G increases by 36 to 386. Derive the new IS and LM equations and draw

these curves on the graph you drew for Part c.

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