# IS-LM Curve Discussed

The following equations describe an economy:

C = C + cYD, 0<c < 1, YD = Y-tY,

I = I - bi, b > 0

G = G

X = X

Q = mY 0<m<1

L = kY - hi, k,h >0

M/P = M/P

_

If C=100, c=0.8, t=0.25, I=700, b=50,

G=900, k=0.25, h=62.5, X=500, m=0.1

M/P = 500/1 .

1- Find the equation that describes the IS curve.

2- Calculate the simpler government spending multiplier in our open economy that applied under constant interest rate; ¥G;

3- If G increases by 50 billion dollars. What will happen to the position of IS curve?

4- Find the equation that describes the LM curve.

5- What are the equilibrium levels of output and interest rate?

6- Calculate the fiscal multiplier; à?; or the government spending multiplier after interest rate adjustment is taken into account.

" à?= ¥G / 1+k ¥G b/h"

7- If G increases by 50 billion dollars. What will be the effect on the equilibrium level of output that you got i(5)

8- Do you think a crowding out happened in this economy? Why?

9- Calculate the monetary policy multiplier; à?b/h

10- If your answer in (8) is yes. Explain Graphically or mathematically how the central Bank can accommodate this fiscal expansion.

Note: draw the suitable graph of each point.

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#### Solution Preview

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The following equations describe an economy:

C = C + cYD, 0<c < 1, YD = Y-tY,

I = I - bi, b > 0

G = G

X = X

Q = mY 0<m<1

L = kY - hi, k,h >0

M/P = M/P

_

If C=100, c=0.8, t=0.25, I=700, b=50,

G=900, k=0.25, h=62.5, X=500, m=0.1

M/P = 500/1 .

c= 0.8

t= 0.25

b= 50

h= 62.5

m= 0.1

I= 700

G= 900

X= 500

C= 100

C=C+cYD=C+cY(1-t)=100+0.8Y(1-0.75)=100+0.6Y

I=I-bi=700-50i

Q=0.1Y

1- Find the equation that describes the IS curve.

Y=C+I+G+X-Q

Y=(100+0.6Y) + (700-50 i) + (900) + (500)- (0.1Y)

or Y= (0.6-0.1)Y + (100+700+900 + 500 ) - 50 i

or Y(1-0.5) = 2200 - 50 i

or Y= 1/0.5 * (2200-50 i)

Or Y=2*(2200-50i)=4400-100 i

Y=4400-100 i IS curve

2- Calculate the simpler government spending multiplier in our open economy that applied under constant ...

#### Solution Summary

The solution discusses 8 questions on IS curve, LM curve, equilibrium output, equilibrium interest rate, fiscal multiplier, government spending multiplier, crowding out, monetary policy multiplier and accommodation of fiscal expansion.

Discuss the properties of the Aggregate Demand Aggregate Supply model and how fiscal policies shift the curves and affect the macro economy.

A). In the basic supply and demand analysis, we usually look at the demand curve and the supply curve for one commodity in a market. When we look at the macro economy, the corresponding terms are called Aggregate Demand (AD) and Aggregate Supply (AS). What do these two curves AD and AS represent and discuss their properties.

B). Fiscal policies are implemented through manipulating the two curves AD and AS. Discuss fiscal policies that shift these two curves. How do these fiscal policies affect your work place?

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