Write down the equations for the is curve and the lm curve., Ask an Expert

Economics

Consider the following IS-LM model for a closed economy:

YD = Y-T
C = c0 + c1YD
I = b0 + b1Y-b2i
M/P = d1Y -d2i

where G and T are constant; c1+b1<1

a) prepare down the equations for the IS curve and the LM curve. Solve for equilibrium output. What is the multiplier?

b) Using the LM relation from part a), express a new equation for investment (I) as a function of Y (note: interest rates should be eliminated in this new equation). For simplicity, students need not expand Y as derived from part a).

c) Under what conditions on the parameters of the model (ie. c0, c1, etc) will investment increase when G decreases? If G decreases by one unit, by how much does I increase?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M972551

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