# IS and LM curves

Given the following parameters for an open economy open economy where C=10+.8(y-T); I=10 G=10 T=10 and imports and exports are given by IM=.3Y and X=.3Y* respectively where Y is foreign output.

Provide an equation that resolves to the lowest level. Given Y*. What is the mulipier effect of this open economy?

Explain the behavior of the IS and LM curves and nominal interest rate in the domestic economy, and then to the exchange rate between the domestic economy.

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#### Solution Preview

Given the following parameters for an open economy open economy where C=10+.8(y-T); I=10 G=10 T=10 and imports and exports are given by IM=.3Y and X=.3Y* respectively where Y is foreign output.

Provide an equation that resolves to the lowest level. Given Y*. I am assuming that y=Y=Y*. Not sure if you are supposed to do that. I am also assuming this is a small open economy. Solving numerically yields the following. See the discussion below on how we get this equation.

Y=10+.8(Y-10)+10+10+.3Y-.3Y

Y-.8Y = 22

Y = 22/.2

Y=110

What is the mulipier effect of this open economy?

Recall that the multiplier is 1/(1-MPC) ...

#### Solution Summary

The behavior of the IS and LM curves and nominal interest rate in the domestic economy is assessed.