Question

Consider a hypothetical economy characterized by the following behavioral equations. (5 point)
C=40-14r+0.2Y Md =30-100r
I= 24-4r MS=60 G=2000 P=2
a. Derive the equations of the IS and LM curves of the economy

Answer 1

We have the information:

$C=40-14r+0.2Y \\[0.3cm] Md =30-100r\\[0.3cm] I= 24-4r \\[0.3cm] MS=60 \\[0.3cm] G=2000 \\[0.3cm] P=2$

In the goods market:

$$Y = C + I + G$$

Therefore:

$$Y = 40-14r+0.2Y + 24-4r + 2000 \\[0.3cm] 0.8Y = - 18r + 2064\\[0.3cm] Y = -22.5r + 2,580...............IS$$