Explore BrainMass
Share

Explore BrainMass

    LM and IS model

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    SUPPOSE THAT C = 60 + 0.8 Yd, I = 150-10r, G= 250, T = 200, Ms = 100, Md = 40 + 0.1Y - 10r

    1.a. write the equations for the IS and LM schedules.
    b. Find the equilibrium values for income (Yo) and the interest rate (Ro)

    2. suppose we change the model in problem 1 such that investment is assumed to be completely interest inelastic: investment does not depend on the rate of interest and we have I=150.
    A. write the new equations for the IS and IM schedules. Show the schedules graphically.
    B. find the new equilibrium values for income and the interest rate.

    © BrainMass Inc. brainmass.com October 9, 2019, 10:55 pm ad1c9bdddf
    https://brainmass.com/economics/general-equilibrium/lm-and-is-model-237127

    Solution Preview

    1.
    a
    The IS schedule is where total spending (Consumer spending + planned private Investment + Government purchases + net exports) equals an economy's total output:
    Y = C + I + G
    Filling in values we have
    Y = 60 + 0.8 Yd + 150-10r + 250
    and we know by definition:
    Yd = Y -T = Y -200 ...

    Solution Summary

    Use of the LM and IS model to find equilibrium interest rates and income.

    $2.19