Task: Suppose that the equation for autonomous planned spending, Apr is Ap = 6,200-200r and the value of the multiplier, k, is 2.5.
(1) Derive the equation for the IS curve, Y = kAp. Graph the IS curve for interest rates between 0 and 8, with intervals of one-half of a percentage point.
(2) Suppose the equation for the LM curve is Y = 13,500 + 100r. Use this equation to explain the level of income at which there is a zero lower bound on the federal funds rate, the interest rate that the Fed controls.
(3) Graph the LM curve for interest rates between 0 and 8, with interval of one-half of a percentage point.