Assume the following model of the economy, with the price level fixed at 1.0:
C = 0.8(Y – T) T = 1,000
I = 800 – 20r G = 1,000
Y = C + I + G (M/P)S = (M/P)d = 0.4Y – 40r
MS = 1,200
A) Write a numerical formula for the IS curve, showing Y as a function of r
alone.
B) Write a numerical formula for the LM curve, showing Y as a function of
r alone.
C) What are the short-run equilibrium values of Y, r, Y – T, C, I, private
saving, public saving, and national saving?
D) Assume that G increases by 200. By how much will Y increase in shortrun equilibrium?
E) Assume that G is back at its original level of 1,000, but MS
(nominal
money supply) increases by 200. By how much will Y increase in short-run
equilibrium