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LM and IS model

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.

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.

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