Question

2. Consider the following IS-LM mode:

C=200 + .25YD

I=150+.25Y-1,000i

G=250

T=200

(M/P)^d =2Y-8000i

M/P=1,600

2a. Derive the IS relation

2b. Derive the LM relation.

2c. Solve for equilibrium real output

2d. Solve for the equilibrium interest rate.

2e. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G.

2f. Now suppose that the money supply increases to M/P=1840. Solve for Y,i,C, and I.

2g. Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G=400. Summarize the effects of an expansionary fiscal policy on Y, i, and C.