1. Assume that the equilibrium in the money market may be described as M/P = 0.5
ID: 1176282 • Letter: 1
Question
1. Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P equals 800.
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.)
b. What is the slope of the LM curve?
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?
d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?
e. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?
Explanation / Answer
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.)
800=0.5Y-100r
Y as a function of r
Y= (800+100r)/0.5
r as a function of Y
r=(0.5Y-800)/100
b. What is the slope of the LM curve?
Upward Sloping Curve
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?
r=1 Y=1800
r=3 Y=2200
r=5 Y=2600
d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?
the LM curve does shift upward and to the left
e. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?
the LM curve does shift downward and to the right
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