Problem
The following equations describe an economy.
Y=C+I+G
C=50+0.75*(Y-T)
I=150-10r
(M/P)d=Y-50r
G=250
T=200
M=3,000
P=4
a. Identify each of the variables, and briefly explain their meaning.
From the above list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph.
(Hint: the answer you're trying to get to is:
Y=1,200-40r
Start with Y = C + I + G and plug in everything you know, then solve for Y.)
b. From the above list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part b).
(Hint: Remember that (M/P)d = M/P from the power points because we're in the short run, and money demand has to equal money supply for it to be in equilibrium. So you start with:
(M/P)d = Y - 50r
(M/P)d = M/P
Plug in what you know and solve for Y.
c. What are the equilibrium level of income and the equilibrium interest rate?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.