Consider the following IS-LM Model C = 189 + 0.52Yd I = 145 + 0.12Y - 1025i G =

Question

Consider the following IS-LM Model

C = 189 + 0.52Yd

I = 145 + 0.12Y - 1025i

G = 329

T = 263

(M/P)^d = 1.6Y - 7737i

M/P = 1579

The IS equation is determined to be Y=1461.78-2847.22i

The LM equation is determined as i=-0.20408+0.00021Y

Initial equilibrium values of Y,i,c, and I are calculated bellow.

Y=1278

i=6.43%

C=717

I=232

Suppose that money supply increases to (m/p)=1737

Calculate the equation for the new LM relation.

i=?+?y round calculations of the constant slope terms to five decimal places.

Explanation / Answer

LM curve equation is obtained by solving the money market i.e money supply =money demand

in previous case money demand was (M/P)^d = 1.6Y - 7737i and money supply was M/P = 1579 so LM curve was obtained by setting 1579=1.6Y-7737i that is i=-0.20408+0.00021Y

now when money supply changes new LM curve is 1737=1.6Y-7737i

so, i=-0.22451+0.00021Y

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

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