Question

consumption=100+0.8Yd

investment= 150-16i

government expenditure= 100

taxes=0.25Y

DD for money=0.2Y-2i

money supply=300

price level=2

determine equilibrium level of income and rate of interest

Answer 1

In goods market,

$Y = C + I + G$

$Y = 100 + 0.8(Y - 0.25Y) + 150 - 16i + 100 [\space as\space Yd = Y - T]$

$Y = 350 + 0.8 \times 0.75Y - 16i$

$Y = 350 + 0.6Y - 16i$

$0.4Y = 350 - 16i$

$Y = 875 - 40i.................. (IS\space curve)$

In money market, $Md = \frac{Ms}{P}$

$0.2Y - 2i = \frac{300}{2}$

$0.2Y - 2i = 150$

0.2Y = 150 + 2i

$Y = 750 + 10i..........(LM \space curve)$

In equilibrium, IS = LM.

$875 - 40i = 750 + 10i$

$50i = 125$

$i = 2.5$

$Y = 750 + 10 x 2.5 = 750 + 25 = 775$