Model of the economy, Write a formula for the IS curve,

Model of the economy

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Reference no: EM13736995

Assume the following model of the economy, with the price level fixed at 1.0:

C = 0.8(Y ? T), Ms = 1200, Md/P = 0.4Y ? 40r,

I = 800 ? 20r, T = 1000, G = 1000,

where Ms and Md are the nominal supply of money and nominal demand for money.

(a) Write a formula for the IS curve, showing Y as a function of r alone.

(b) Write a formula for the LM curve, showing Y as a function of r alone.

(d) Assume G increases by 200. By how much will Y increase in short-run equilibrium? What is the government purchases multiplier?

(e) Assume that G is back at its original level, but Ms Increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for the money supply?

Reference no: EM13736995

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