For everyone saying something is missing. This is all the information that came

Question

For everyone saying something is missing. This is all the information that came with it. For money supply and demand there is nothing else included

An economy is represented by the following system of equations and identities: I 1500.25Y-1000 G 250; T- 200 C is private consumption, Y income, T taxes, I business investment, G government spending, i the interest rate, M money, and P the price level a. Derive the equation for the IS curve and the equation for the LM curve 10 points Solve for equilibrium output, interest rate, and investment. 10 points Now assume that the Federa Reserve Bank reduces money supply by 240. Solve for the ne equilibrium values for output, the interest rate, and investment Explain why investment changes the way it does (or does not change whatever is the case). 10 points

Explanation / Answer

a.i. The IS relation is.

Y = C + I + G

Y = 200 + 0.25YD + 150 + 0.25Y – 1000i + 250

Y = 200 + 0.25(Y – T) +150 + 0.25Y – 1000i + 250

Y = 200 + 0.25Y – 0.25T + 150 + 0.25Y – 1000i + 250

Y = 200 + 0.25Y – 0.25(200) + 150 + 0.25Y – 1000i + 250

Y = 200 + 0.25Y – 50 + 150 + 0.25Y – 1000i + 250

Y = 0.5Y + 550 – 1000i

0.5Y = 550 – 1000i

Y = 1100 – 2000i : Which is the IS relation.

ii. The LM relation is found by first equating Money Supply with Money Demand:
(M / P)s = (M / P)d

1600 = 2Y – 8000i

1600 – 2Y = -8000i

8000i = 2Y – 1600

i = Y/4000 – 1600/8000

i = Y/4000 – 0.2 : Which is the LM relation.

(b) We are asked to use the IS and LM relations from (a) to solve for the equilibrium levels of output (Y) and interest rate (i). We solve the system of two equations with two unknowns (Y and i):

IS: Y = 1100 – 2000i

LM: i = Y/4000 – 0.2

We first sub the expression for i from the LM relation into the IS relation:

Y = 1100 – 2000(Y/4000 – 0.2)

Y = 1100 – 0.5Y + 400

Y = 1500 – 0.5Y

1.5Y = 1500

Y = 1000

We now sub this value for Y into the LM relation to find the corresponding value for i:

i = Y/4000 – 0.2

i = 1000/4000 – 0.2

i = 0.25 – 0.2

i = 0.05

i = 5%

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