The IS-LM model is used to analyse simultaneous equilibrium in the goods market and the money market
Question:
The IS-LM model is used to analyse simultaneous equilibrium in the goods market and the money market in the short run. You have the following information about an economy:
C=50+0.8Yd (consumption function with respect to disposable income)
I=210-12i (investment function with respect to the interest rate)
G=400 (government spending)
T=0.5Y (taxes with respect to national income)
MD=Y-100i (money demand function with respect to national income and the interest rate)
MS=500 (money supply)
a. Determine the equation describing the equilibrium in this economy's goods market, i.e., the equation for the IS curve.
b. draw the IS curve in an appropriately labelled diagram. briefly explain what it shows.
c. Determine the equation describing the equilibrium in this economy's money market, i.e., the equation for the LM curve.
d. draw the LM curve in the previous diagram. briefly explain e. Mathematically identify the simultaneous equilibrium in the goods market and the money market: calculate the equilibrium values of national income and the interest rate.
f. show the equilibrium in the diagram. d. show in the diagram, How would an increase in government spending affects the equilibrium national income and interest rate? Briefly explain the change.
Business Analytics Communicating With Numbers
ISBN: 9781260785005
1st Edition
Authors: Sanjiv Jaggia, Alison Kelly, Kevin Lertwachara, Leida Chen