C = 1275 + 0.5(Y-T) – 200r I = 900 – 200r Real Money demand, L = 0.5Y – 200i Exp
ID: 1174056 • Letter: C
Question
C = 1275 + 0.5(Y-T) – 200r
I = 900 – 200r
Real Money demand, L = 0.5Y – 200i
Expected inflation, ? = 0
Full employment output, = 4600
a.) Suppose that T = G = 450 and M = 9000
Find an equation describing the IS curve
Find an equation describing the LM curve
Find an equation for the aggregate demand curve (Hint: Use IS and LM equations to find a relationship between Y and P)
What are the general equilibrium values of output, consumption, investment, real interest rate and price level?
b) Suppose M = 4500, T and G remain the same.
What is the equation for the aggregate demand curve?
What are the general equilibrium values of output, consumption, investment, real interest rate and price level?
c.) Suppose T = G = 330 and M = 9000
What is the equation for the aggregate demand curve?
What are the general equilibrium values of output, consumption, investment, real interest rate and price level?
Explanation / Answer
a. IS curve Equation is same as total output equal to aggregate demand.
Y = C + I + G
Y = 1275 + 0.5(Y-T) – 200r + 900 – 200r + 450
Put T = 450
Y = 1275 + 0.5Y - 225 - 400r + 1350
Y - 0.5Y = 2400- 400r
1. Y = 4800 - 800r is IS equation.
LM equaiton, Real Money demand (M/P) = L
Substitute all given values, 9000 / P = 0.5Y – 200i
0.5Y = 9000/P + 200i
2. LM Equaton, Y = 18000/P + 400i
3. AD equation, Y = C + I + G = Y = 1275 + 0.5Y - 225 - 400r + 1350?
It is given that full employemnt GDP = Y = 4600
4600 = 4800 - 800r
800r = 200
r = 0.25 (Real Interest rate)
Use LM equation r = i = 0.25 and Y = 4600
4600 = 18000/P + 400x0.25
4500 = 18000/P
P = 4 (Price Level)
C = 1275 + 0.5(Y-T)
Y = 4600 and T = 450
C= 1275 + 0.5 x (4600-450)
C = 3350 (Consumption)
I = Y - C - G = 4600 - 3350 - 450 = 800
Investment = 800
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