Question

Consider the following IS-LM model:

C = 200 + 0.25Y_D

= 150 + 0.25Y - 1000i

G = 250

T = 200

(M/P)^d = 2Y - 8000i

M/P = 1600

a) Derive the IS relation. (Hint: you want an equation with Y on the left side and everything else on the right)

b) Derive the LM relation. (Hint: it will be convenient for later use to rewrite this equation with i on the left side and everything else on the right)

c) Solve the equilibrium for real output. (Hint: Substitute the expression for the interest rate given by the LM equation into the IS equation and solve for output)

d) Solvw h eequilibrium interest rate. (Hint: Substitute the value you've obtained for your Y in part (c) into either the IS or LM equations and solve for i . If your algebra is correct you should get the same answers in both eqautions.)

e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G

f) Now suppose that the money supply increases to M/P = 1840. Solve for Y, i, c and T, and describe in words the effects of an expansionary monetary policy.

g) Set M/P equal to its initial value of 1600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, i, and C.