ws curve: 𝑊/𝑃= 𝑃^𝑒/𝑃(40/100 + 𝑧 − 10𝑢)
production function: 𝑌 = 2𝑁
job insurance generosity: 𝑍 = 60/100
labor force: 𝐿 = 500
profit margin: 𝑚 = 1
and whose demand is characterized by the equations:
consumption: 𝐶 = 40 + 0.1(𝑌 − 𝑇)
investments:𝐼 = 14 − 20𝑖
government spending: 𝐺 = 40
taxes: 𝑇 = 40
expected inflation: 𝜋𝑒 = 0
Nominal Currency Stock: 𝑀̅ = 1000
actual cash demand: 𝑀^𝑑/𝑃 = 𝑌 − 120𝑖

What is the equation of the IS curve? What is the equation of the LM curve?

2. Assume that households’ consumption function is given by C(Y − T) = 50 + 0.75(Y − T), that firms’ investment function is I(r) = 150 − 10r, government spending is G = 150, and the tax bill T = 200.

(a) What is the Marginal Propensity to Consume (“MPC”)?

(b) What is the equilibrium level of real GDP, in the goods market, if the real interest rate is 5%? (Plug in r = 5 for 5%, rather than 0.05 This is an assumption about the way we scale the coefficients in the investment function.)

(c) Solve for the equation of the IS Curve (“Investment-Savings”). How will this equation change if government spending increases to 200? The money supply is MS = 3000 and the price level is P = 4. Money/liquidity demand is given by Md/P = L(r, Y ) = Y − 50r.

(d) Solve for the equation of the LM Curve (“Liquidity-Money”).

(e) Based on your answers to the previous two questions, what are the equilibrium levels of the real interest rate and real GDP? (G is back to 150.)

(f) Assume now that P is unknown. Solve for the equation of the Aggregate Demand curve (“AD”)

C = 1275 + 0.5(Y-T) – 200r

I = 900 – 200r

Real Money demand, L = 0.5Y – 200i

Expected inflation, ? = 0

Full employment output, = 4600

a.) Suppose that T = G = 450 and M = 9000

Find an equation describing the IS curve

Find an equation describing the LM curve

Find an equation for the aggregate demand curve (Hint: Use IS and LM equations to find a relationship between Y and P)

What are the general equilibrium values of output, consumption, investment, real interest rate, and price level?

b) Suppose M = 4500, T and G remain the same.

What is the equation for the aggregate demand curve?

What are the general equilibrium values of output, consumption, investment, real interest rate, and price level?

c.) Suppose T = G = 330 and M = 9000

What is the equation for the aggregate demand curve?

What are the general equilibrium values of output, consumption, investment, real interest rate, and price level?

The following equations describe the macro-economy:

Consumption function: C = 50 + 0.5(Y-T)
Taxes: T = 0.2Y
Government spending: G = 100
Investment: 200 - 10000i
Real Money Supply: M/P = 100
Real Money demand: M^d / P = 2Y - 20000i

Derive the IS and LM curves