(A) Given: C = 100 + 0.75Yd (where Yd = Y-T) I = 120-600i G = 200 T = 20 + 0.2Y Ms/P = 300 Md/P = 50+0.5Y-600i Where: C = Consumption Y = Income I = Investment G = Government spending T = Taxes i = interest rate Ms/P = RealMoney Supply Md/P = Real Demand for Money (a) Derive the IS and LM curves (10 Marks) (b) Obtain the equilibrium: i. Interest rate (5 Marks) ii. Income (3 marks) iii. and consumption (2 marks)
(a)
Money Demand = Money Supply,
(b)
(i)
Equilibrium interest rate :
(ii)
Substituting value of i in IS curve equation, we get,
Substituting value of i in IS curve equation, we get,
Equilibrium Income :
Equilibrium Consumption :
Comments
Leave a comment