Question

The following equations describe an economy.

Y=C+I+G

C=50+0.75*(Y-T)

I=150-10r

(M/P)d=Y-50r

G=250

T=200

M=3,000

P=4

Identify each of the variables, and briefly explain their meaning.

From the above list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph.

From the above list, sue the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part b).

What are the equilibrium level of income and the equilibrium interest rate?

Answer 1

To find the equilibrium level of income, the student must set aggregate expenditures equal to national income, solving for Y with the given economic parameters. Adjusting government spending to reach a potential GDP of 3,500 can be done by direct substitution or by using the multiplier.

Step-by-step explanation:

The student is asking how to find the equilibrium level of income in an economy given a set of economic equations that include consumption (C), taxes (T), investment (I), government spending (G), exports (X), and imports (M). Equilibrium occurs where the aggregate expenditures (AE) equal national income (Y), suggesting that the amount produced in the economy is being purchased without any excess.

To find equilibrium, we set Y = AE and then plug the rest of the parameters into the equation. For example, if Y = C + I + G + X - M, and we know the specific values or relationships of each variable, we can solve for Y.

If potential GDP is identified as 3,500, we would adjust G to see what level of government spending is needed to achieve this output level. We can do this by directly substituting 3,500 into the equations or by calculating the spending multiplier and finding out the necessary change in G.