2. (The IS-LM-PC model): Suppose that the following behavioral relations charact

Question

2. (The IS-LM-PC model): Suppose that the following behavioral relations characterize the goods market in period t: (i)C1 = 60 + 0.5 YD, (ii)I| = 90 + 0.25Y1-200(rl + XI) (iii) G 1-500, T t-100 (iv)It = 0 (a) Derive the IS curve (as a relation between Yt and rt). (b) Assume the LM curve is given by r t = 0.05 (ie, in period t, the central bank sets the real interest rate at 5 %). What is the short-run equilibrium level of output (Yt)? (c) Suppose that L-2950 and un = 0.20 (where L: total population, un natural rate of unemployment) Calculate the value of potential output (Y). How does Yn compare to the short-run equilibrium level of output (Yt )?

Explanation / Answer

As per Chegg policy, first four questions are answered below.

a)

IS curve:

Y = C+I+G+NX

Y = 60+0.5(Y-100)+90+0.25Y-200(r+0)+500

Y = 650+0.5Y-50+0.25Y-200r

Y = 600+0.75Y-200r

0.25Y = 600-200r

Y* = 2400-800r

b)

LM: r = 0.05

Y* = 2400-800(0.05)

Y* = 2360

c)

Potential GDP = 2360/(1-0.2) = $2950

d)

rn = (2400-2950)/800 = 6.875%

This rn > rt

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.