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Compute new equilibrium and explain results on ISLM

Y = 1550 - 2400i = 600 + 3000i
950 = 5400i
i = 0.176
substitute into IS:
Y= 1550 - 2400*0.176 = 1127
Then substitute Y and i into C and I:
C= 300+.3(Y-T) = 300 + 0.3 * (1127 - 250) = 563.1
I= 250+.2Y-1200i = 250 + 0.2* 1127 - 1200 * 0.176 = 264.2

3. Then assume M/P rises to 1890 and solve for the new Y and i. hide problem
Now the LM becomes:
3Y-9000i =1890
3Y = 1890 + 9000i
Y = 630 + 3000i

Then the new equilibrium:
1550 - 2400i = 630 + 3000i
920 = 5400i
i= 0.17
substitute into IS:
Y= 1550 - 2400*0.17 = 1142

Given the above if the government raises taxes and expenditures by 50 compute what happens to Y and i

Describe in words what happens to the ISLM curves?

Explain the result

Solution Preview

For the new IS curve we need to calculate:
Y = C + I+ G
Where C =300+.3Yd
and Yd = Y-T
We know that T is now 300, so Yd = Y-300
Substitute into the equation for Y so that
Y = 300+.3(Y-300) + 250+.2Y-1200i +350

Now with some algebra you can get all ...

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