Question

you are given the hypothetical information about the commodity and money markets of a closed economy the commodity markets consumption function c=100+0.3y investment function =2000-2.1r the money market 1t =0.2y ls=10-2r ms=1500 a,Derive the IS curve b,Derive the lm curve c, Derive the equilibrium level of income and rate of interest d, if the Money supply is increased by 75%what would be the effect of equilibrium level of income and rate of interest​

Answer 1

a. The IS curve can be derived from the given information as IS: Y=6000-2.1R

b. The LM curve can be derived from the given information as LM: Y=7500-4.2R

c. In order for the IS and LM curves to intersect and reach equilibrium, the equation would be 6000-2.1R = 7500-4.2R

Therefore, R= 0.6 and Y=4500

d. If the money supply is increased by 75%, this would result in an increase in the LM curve as well. The new equation would be LM: Y=13125-6.3R. Therefore, the new equilibrium values would be R= 0.95 and Y=6187.5