Answer to Question #172485 in Microeconomics for Ruth

Question

C=100+0.50Y, Ip=100-20r, Mt=0.10Y, Ms=100-10r, M=80.

a. The IS–LM functions show the relationship between interest rates and real output, in the goods and services market and the money market.

The IS curve is defined by the equation Y = C + I + G + NX, so Y = 100 + 0.5Y + 100 - 20r - 80, Y = 240 - 40r. The LM curve is defined by the equation Mt = Ms, so 100 - 10r = 0.1Y, Y = 1000 - 100r.

b. If we assume an increase in Investments by 100 units, then the IS function will shift to the right.

c. The intersection of IS-LM functions defines four areas, and the behavior of the markets for goods and money for each area will change.

Answer 1

a. The IS–LM functions show the relationship between interest rates and real output in the goods and services market and the money market.

The IS curve is defined by the equation Y = C + I + G + NX, as we have no government purchases G and exports X, then:

Y = 100 + 0.5Y + 100 - 20r - 80,

Y = 240 - 40r.

The LM curve is defined by the equation Mt = Ms, so:

100 - 10r = 0.1Y,

Y = 1000 - 100r.

b. If we assume an increase in Investments by 100 units, then the IS curve will shift to the right, both equilibrium interest rate and output will increase.

c. The intersection of IS-LM functions defines four areas, and the behavior of the markets for goods and money for each area will change in every area.