equilibrium interest rate

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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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Attachments

LM_IS_definition.doc

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.

$2.49