A macroeconomy is described by the foloowing relationships:?

Question

consumption: C= 5+ 0.9Yd - 2r

Investment: I = 1-3r

Government expenditure: G= 2.5

Exports: X=2

Imports: Z=0.5+0.275Yd

Direct income tax: td = 0.2

Demand for real money balances: Md/P= 4 + 0.4 -8r

Money: Ms = 34

Price Level: P=5

Where y is output, r is interest rate and Yd is disposable income

can anyone derive and graph the IS and LM curves?
Find the equilibrium values for outout and the interest rate

PLEASE CAN ANYONE HELP I HAVE ABOUT 3HOURS LEFT TO DO THIS AND I DONT UNDERSTAND ANY OF IT PLEASE.......!!!!!!!!!!

Answer 1

IS-LM is in r and y.

IS: Equilibrium in goods market:
Y=C+I+G+X-M

Since C and I depend on r, you have a relationship between Y and r.
Note that since Imports depends on Disposable Incoem, that;s where you use the td:
Z=.5+.275(.8)Y
That's the IS curve.

LM: Equilibrium in money market:
Md=Ms.
You are given price and so can find that the LM does NOT depend on Y.

Then you equate IS and LM and solve the equilibrium in the economy.

The type of economy is one where fiscal policy is totally ineffective in affecting output; all fiscal policies do is increase interest rates, crowding out: any increase in G is met by an equilvalent drop in I.

For further details on ISLM:
http://uk.answers.yahoo.com/question/index;_ylt=AlOExCZ.Rw0KKqYcr_m8VgwgBgx.?qid=20070301081521AALY4FO&show=7#profile-info-wlxodFCqaa

Answer 2

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