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1. Consider the following economy:
Desired consumption C d =1275 +0.5(Y - T) - 200r.
Desired investment Id =900 - 200r.
Real money demand L =0.5Y - 200i.
Full-employment output Y =4600.
Expected inflation πe =0.

a. Suppose that T = G = 450 and that M = 9000. Find an equation describing the IS curve. (Hint: Set desired national saving and desired investment equal, and solve for the relationship between r and Y, given P.) Finally, find an equation for the aggregate demand curve. (Hint: Use the IS and LM equations to find a relationship between Y and P.) What are the equilibrium values of output, consumption, investment, the real interest rate, and the price level?

Microeconomics, Economics

  • Category:- Microeconomics
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