TABLE OF CONTENTS

Question 1 of 2

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

The following equations describe an economy.

Y = C + I + G.

C = 120 + 0.5 (Y – T).

I = 100 – 10 r.

(M/P)d = Y – 20r.

G = 50.

T = 40.

M = 600.

P = 2.

From the above list, use the relevant set of equations to derive the IS curve.
IS: _____________
Review Chapter 11 for details on the variables used in the ISLM model. Review pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve.

The graph shows the IS curve as a downward sloping line. The line intersects the output on the horizontal axis at 500, and the interest rate on the vertical axis at 25. The equation of the IS curve is labeled Y = 500 -20r.
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The following equations describe an economy.

Y = C + I + G.

C = 120 + 0.5 (Y – T).

I = 100 – 10 r.

(M/P)d = Y – 20r.

G = 50.

T = 40.

M = 600.

P = 2.

From the above list, use the relevant set of equations to derive the LM curve. What are the equilibrium level of income and the equilibrium interest rate?
LM: ________
Review pages 330-332, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 333-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.

The equilibrium level of income, Y, is , and the equilibrium interest rate, r, is %.

Review pages 330-332, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 333-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.

The graph shows the IS and the LM curves. The IS curve is a downward sloping line with the equation Y = 500 -20r. The line intersects the output on the horizontal axis at 500, and the interest rate on the vertical axis at 25. The LM curve is an upward sloping line with the equation Y = 300 + 20r. This line intersects the output on the horizontal axis at 300. The equilibrium output and interest rate is shown in the graph as a dotted line drawn from the horizontal and vertical axes to the intersection point of the IS and LM curves. The IS and LM curves intersect at an income of 400 and an interest rate of 5%.
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