Question

1.     Drive the AD (Aggregate Demand) curve using the following: IS curve is given as Y = 20XX-100i, LM₁ is Y= 1000+25i (when P = 1) and LM₂ is Y = 500+25i (when P =2), where XX is the last two digits of your student ID number. Show the derivation in (interest rate-income) and (price level-income) spaces. (You may insert a snapshot of the graphs if drawn manually).

Answer 1

IS curve:

 $Y = 20XX -100i$

$XX=30$

$Y =2030 -100i$

The equilibrium output is determined where IS = LM.

At price 1,

$2030 −100i=1000 + 25i$

$125i=1030$

$i=8.24$

$Y=2030-100(8.24)$

$Y=2030-824$

$Y=1206$

At price 2,

$2030−100i=500 + 25i$

$125i=1530$

$I=12.24$

$Y=2030 −100(12.24)$

$Y=2030 −1224$

$Y=806$

Interest rate income:

Y¹_i$=1206$

Y²_i$=806$

Deviation$=1206-806$

$=400$

Price level income:

Y¹_p$=1000+25(1)$

$=1025$

Y²_p$=500+25(2)$

$=550$

Deviation$=1025-550$

$=475$