equilibrium interest rate
IS/LM Homework
The economy of Econoville consists of two markets as follows:
Product Market
C = 2.0 + 0.70 Yd
I = 3.0 + 0.12 Y - 0.20(r) %
Yd = Y - T
Y = C + I + G
G = 12
T = 10
Money Market
MS = 12.0
MD = 4.0 + 0.20Y - 0.4(r) %
MD = MS
Part a
Derive the IS curve for Econoville
Part b
Derive the LM curve for Econoville
Part c
What is the equilibrium interest rate (r) and equilibrium level of income?
Attached are the definitions of LM and IS.
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Solution Preview
Part a
Derive the IS curve for Econoville
The IS Equation
Y = C + I + G + (X - M)
Y = [2.0+0.70(Y-T )] + [3.0 + 0.12 Y - 0.20(r)] + [12] + 0
Y = [2.0+0.70(Y-10)] + [3.0 + ...
Solution Summary
This solution determines the equilibrium interest rate (r) and equilibrium level of income.
$2.19