Consider the following closed economy:

a. Suppose that T = G = 450 and that M = 9000. Find an equation describing the IS curve. (Set desired national saving and desired investment equal, and solve for the relationship between r and F.) Find an equation describing the LM curve. (Set real money supply and real money demand equal, and again solve for the relationship between r and Y, given P.) Finally, find an equation for the aggregate demand curve. (Use the IS and LM equations to find a relationship between Y and P.) What are the equilibrium values of output, consumption, investment, the real interest rate, and the price level? Assume that there are no misperceptions about the price level.
b. Suppose that T = G = 450 and that M = 4500. What is the equation for the aggregate demand curve now? What are the equilibrium values of output, consumption, investment, the real interest rate, and the price level? Assume that full-employment output F is fixed.
c. Repeat part (b) for T = G = 330 and M = 9000.

Transcribed Image Text:

Desired consumption Cela 1275 + 05(Y-T)-20. Desired investment pt 900-200r. Real money demand L = 0.5Y-200i. Full-employment output Y=4600 Expected inflation , = 0.