Answer to Question #214752 in Economics for Bernice maina

Question

Consider the Economy of Rwanda. The consumption function is given by 𝐶 = 200 + 0.75[𝑌 − 𝑇] while the investment function is 𝐼 = 200 − 25𝑟. Government purchases and taxes are both 100.

The money demand function of Rwanda is [𝑀 𝑃⁄ ] 𝑑 = 𝑌 − 100𝑟. The nominal money supply is 100 and the price level P is 2. [13 Marks]

i) Derive the IS curve equation.

ii) Draw a well labeled diagram of the IS Curve.

iii) Derive the LM curve equation.

iv) Draw a well labeled diagram of the LM Curve.

v) Determine the equilibrium level of income and equilibrium interest rate

2. Using an appropriate hypothetical example, describe how commercial banks “creates and multiplies money” in an economy [4 Marks]

3. Using appropriate Phillip's curve diagrams, describe the "short-run" and "long-run" relationships between inflation and unemployment. [3

Answer 1

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