Answer to Question #109958 in Macroeconomics for kgothatso

Question

Consider the following IS-LM model:
C = Co + c1(Y-T)
I = b0 + b1Y -b2i
M/P = d1Y – d2i
a. Solve for equilibrium output. Assume (Assume c1 + b1 < 1).
Now let investment depend on both sales and the interest rate:
b. Solve for equilibrium level of interest rate.
Let’s go behind the scene in the monetary market. Use the equilibrium in the money market M/P = d1Y – d2i to solve for the equilibrium level of the real money supply.
How does the real money supply vary with government spending?

Answer 1

a)Y*={1/(1-c1-b1)][Co-c1T+b0-b2i+G}

b)Y*=[1/c1-b1+b2d1/d2)][Co-c1T+b0+(b2/d2(M/P+G]

M/P=Y/V

d1Y - d2i=[{1/(1-c1-b1)][Co-c1T+b0-b2i+G}]/V

With the growth of government spending, inflation is increasing, therefore, the real money supply is decreasing