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    equations for IS and LM curves

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

    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.

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    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

    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
    700 = 0.2Y - ...

    Solution Summary

    This job provides equations for IS and LM curves.