Solve for the equation of the IS Curve (âInvestment-Savingsâ) from the original consumption, investment and government spending functions. That is, for different levels of interest rate, what will be the GDP? 1
2. How will the IS equation change if government spending increases to 200?
3. Suppose the money supply is MS = 3000 and the price level is P = Money/liquidity demand is given by Md/P = L(r,Y) = Y â50r. Solve for the equation of the LM Curve (âLiquidity-Moneyâ).
4. Based on your answers to the previous two questions, what are the equi- librium levels of the real interest rate and real GDP? (G is back to 150.)
5. Allow the price level to be a variable now and solve for the aggregate demand induced by the IS-LM intersection. This is to say, solve for r in either the IS curve or LM and plug it into the other. This should leave an equation in Y and P. 6. Show the derivation of the AD curve graphically: Plot the IS and & LM curve and demonstrate how, when price-level moves this induces a new GDP level
Solve for the equation of the IS Curve (âInvestment-Savingsâ) from the original consumption, investment and government spending functions. That is, for different levels of interest rate, what will be the GDP? 1
2. How will the IS equation change if government spending increases to 200?
3. Suppose the money supply is MS = 3000 and the price level is P = Money/liquidity demand is given by Md/P = L(r,Y) = Y â50r. Solve for the equation of the LM Curve (âLiquidity-Moneyâ).
4. Based on your answers to the previous two questions, what are the equi- librium levels of the real interest rate and real GDP? (G is back to 150.)
5. Allow the price level to be a variable now and solve for the aggregate demand induced by the IS-LM intersection. This is to say, solve for r in either the IS curve or LM and plug it into the other. This should leave an equation in Y and P. 6. Show the derivation of the AD curve graphically: Plot the IS and & LM curve and demonstrate how, when price-level moves this induces a new GDP level
