Question

Q3. Suppose that

C = 60 + 0.8YD

I = 150 - 10r

G = 250

T = 200

Ms = 100

Md = 40 + 0.1Y - 10r

( all the magnitudes are in real terms)

a. Write the equations for the IS and LM schedules.

b. Find the equilibrium values for income and the interest rate .

Suppose we change the model such that investment is assumed to be completely

interest inelastic; investment does not depend on the rate of interest and we have

I = 150.

c. Write the new equations for the IS and LM schedules. Show the schedules graphically.

d. Find the new equilibrium values for income and the interest rate. ( 4+2+8+3=17 marks)​

Answer 1

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