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    IS-LM Curve Discussed

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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 .

    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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    https://brainmass.com/economics/general-equilibrium/is-lm-curve-discussed-6235

    Solution Preview

    Please see the attached file.

    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.

    $2.19