An economy is described by the following? equations: ???Desired? consumption: C

Question

An economy is described by the following? equations:

???Desired? consumption:

Cd?=110?+0.50(Y?T?)?500r.

???Desired? investment:Id=110-500r.

???Government? purchases: G? =110.

???Government? taxes: T ?=120.

???Real money? demand: L ?=0.50Y-1050r.

???Nominal money? supply: M? =1,350.

????Full-employment output:Upper Y overbarY?=500.

Assume that the expected inflation rate is zero so that money demand depends on the real interest rate.

Find the equation for the IS curve

?(reportyour coefficients with one decimal

place?):

???Y? =___-_____r

Explanation / Answer

Cd?=110?+0.50(Y?T?)?500r.

On substituting T = 120, Cd?=110?+0.50(Y?120?)?500r.

Cd = 50 + 0.50Y -500r

G = 110

I = 110-500r

NX = 0

Y = C + I + G + NX

Y = 50 + 0.50Y -500r +110 + 110-500r

Y - 0.50 Y = 270 - 1000r

Y = (270 - 1000r)/0.50

The equation for the IS curve = Y = 540 - 500r

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