Explore BrainMass
Share

equations for IS and LM curves

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Difficulty identifying formulas for use. also, do multipliers and autonomous spending have to be calculated for item 1/IS curve? For the last item, does autonomous consumption and investment have to be computed to derive?

Assume following (equations) summarize/represent structure of economy. If:

C=Ca + 0.75(Y-T)
Ca=800-25r
T=400+0.2Y
Ip=600-25r
G=1200
(M/P)^d = 0.2Y-20r
M^s/P=700

1. What are equations for IS and LM curves? What is equilibrium level of income and interest rate? What if mix of fiscal and monetary policies is changed. Te money supply is increased by 100 while government spending reduced by 250:
2. Does investment increase, decrease or remain unchanged? Why/calculate.
3. Does consumption increase, decrease or remain unchanged? Why/calculate.

© BrainMass Inc. brainmass.com October 24, 2018, 9:03 pm ad1c9bdddf
https://brainmass.com/economics/demand-supply/115370

Solution Preview

1. The IS curve is
Y=C(Y-T) + I(r) + G
Thus, Y = Ca + 0.75(Y-T) +600-25r+1200
Replacing teh value of Ca and T we get

Y =800-25r + 0.75(Y-400-0.2Y) +600-25r+1200
Y = 2300 - 50r + 0.6 Y
0.4Y = 2300-50r
Y=5750-125r

The LM curve is determined by equating the demand for and supply of real money balances. The supply of real balances is 700. Setting this equal to money demand, we find:

(M/P)^d = 0.2Y-20r
M^s/P=700
700 = 0.2Y - ...

Solution Summary

This job provides equations for IS and LM curves.

$2.19
See Also This Related BrainMass Solution

Equations of the IS and LM Curves

Consider the following numerical version of the IS-LM model in a closed economy:

C=400+0.5Yd; I=700-4000r+0.1Y; G=200; TP=200; Yd=Y-TP

RLMD=0.5Y-7500r; RLMS =500; X=M

A) Find the equations for the IS curve and LM curve.

B) Solve for equilibrium real output (Y), interest rate (r), consumption (C), and Investment (I).

C) If government spending increased to 700, solve again for the equilibrium Y, r, C, and I.

View Full Posting Details