Question

I need help with the last part of this questions with the new curve etc

A= C + + G + X - M C = 0.75Y = 1200 - 50 G = 100 X = 300 M= 200 Y = A L = 0.25Y - 25i (M/P) = 250 L = (M/P) Derive the IS equation from the above model. Derive the LM equation from the above model. Derive the equilibrium levels of Income Y and Interest Rate i. What is Investment spending if the interest rate is at the equilibrium level? If the government increases spending G by 100: i. What would the new IS Curve look like? ii. What would the new LM curve look like? iii. What would the new equilibrium income Y and Interest | be? iv. At this new equilibrium, what would the level of Investment spending be?

Answer 1

If Govt Increases its spending by 100, then New is will be a 100 too new a = 200 New Is equation y=C+I+ 4+x-M Y 20.757 +1200 - Sit 200 +300-200 Y-0.75 Y = 150o-se 0.25y = isoo-si Y = Soon (1) X = 6000 - 204 cos equation) Money Market Equilibrium Md - Ms 0.25% -25 à = 250 nom do 0.25% Y = 250 tasi = 250 tasi ii) y = 1000 + 100 i (L.M equation) solving Is and LM equation 6000-201 = 1000 tlooi 6000 -1000 = 1004 + 204

S000 = 1201 is sooo 120 ů = 41.66 Substituting i into Is equation y = 6000 - 20 (U1.66) = 6000- 83333 Y = 5,166.66 iv) - Aty At y=5166 and i = 41.66 I = 1200 -se =1200-S (4166) = 1200- 208.3 I =991.70