CHAPTER 5: GOOD AND FINANCIAL MARKETS. THE IS LM MODEL
1.-Given the following functions describing the behavior of agents in an economyC= 40+ 0,8 (Y – T)
I = 70 – 2i
T = 20
G = 16
1. - Equilibrium equation in the economy Y = C + I + G
2.- Calculate the ISrelation of the economy ( Y = f ( i ), o i = f( Y )
3.- Calculate the new IS relation if now investment function change to
I2 = 80-2i
4.- calculatethe value in equilibrium of Y, C and I if i = 10%.
5.- Represent The IS curves calculated previously and the equilibrium values of I and Y.
2.- Supposethe monetary sector of an economy can be represented by the following equations
Money supply Ms = 200
Money Demand Md = 0,2Y – 4 i
a) Theequation of the LM relation
b) If the Money supply changes to Ms = 210 calculate the new LM curve
c) Explain why has change the new LM curve
3.-Consider aneconomy represented by the following equations:
C = 80 + 0,8 (Y – T)
I = 150 – 6 i
G = 20
T = 0
Money Supply Ms = 150Money Demand Md = 0,2Y – 4 i
a) Equilibrium in the goods markets ( IS curve )
b) Equilibrium in the financial markets ( LM curve)
c) Yand i of equilibrium in the whole economy
d) The following changes take place:
i. Ms = 200. Calculate the new LM curve and the new Y and i ofequilibrium in the economy. Comments whas has happened.
ii. G = 70 Calculate the new IS curve and Y and i of equilibrium in the economy. Explain what has happened.