Consider a simple economy described by:
A = C + I + G + X - M
C = 1000 + 0.5Y – 200i
I = 14000 + 0.2Y– 200i
G = 1200 - 0.1Y
X = 2000
M= 1000 -.05Y
Y = A
L = 0.33Y – 25i
(M/P) = 3000
L = (M/P)
Derive the IS equation from the above model.
Derive the LM equation from the above model.
Derive the equilibrium levels of Income Y and Interest Rate i.
What is Investment spending if the interest rate is at the equilibrium level?
If the government increases spending G by 100:
i. What would the new IS Curve look like?
ii. What would the new LM curve look like?
iii. What would the new equilibrium income Y and Interest I be?
iv. At this new equilibrium, what would the level of Investment spending be?
(make sure you answer all the questions)