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    the multiplier

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    Demand: Z=C+I+G
    Consumption: C=Co+C1(Y-T)
    Investment: I=aY-bi

    1) Derive the IS-curve
    Now assume that the interest rate is determined by: M/P=d1Y-d2i, where P is the price level, Y is real GDP and M/P is the real money stock.

    2) Derive the LM curve

    Suppose the value of the parameters of the model are: c1=0.5, a=0.3,b=1,Co=225,T=G=400,d1=1,d2=10.M=5 and P=1

    3) solve for the overall equilibrium in the goods and money market. (solve for Y and i)

    4) What is the multiplier, and what effect does it have?

    Please do step by step and explain along the way.

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    https://brainmass.com/economics/price-levels/finding-multiplier-derive-iscurve-155922

    Solution Preview

    1) Derive the IS-curve
    The aggregate demand is Y=C+I+G
    or Y = Co+C1(Y-T) + aY-b i + G
    Y = Co+C1Y- C1 T + aY-b i + G
    (1-C1-a)Y = Co - C1 T - b i + G

    Then, IS curve is:
    (1-C1-a)Y + C1 T = Co - b i + G
    or
    Y = (Co - C1 T -b i + G)/(1-C1-a)

    Now assume that the interest rate is determined by: M/P=d1Y-d2i, where P is the ...

    Solution Summary

    The solution finds the multiplier in this case.

    $2.19