12. Why LM slopes upward to the right? This is because with higher levels of income, demand curve for money (Md) is higher and consequently the money market equilibrium (that is, the equality of the given money supply with money demand curve occurs at a higher rate of interest). This means that rate of interest varies directly with income. 13. down the equation for IS curve. Equation for IS curve: Y = 14. Write down the equation for LM curve. r = (kY ) Equation for LM curve: – 15. The following equations describe an economy: Problem: C = 10 + 0.5Y; I = 190 20r. Derive the equation for IS curve. – Solution: IS describes the equation for product market equilibrium at various combinations of level of income and rate of interest. Y = AD = C + I Y = 10 + 0.5Y + 190 20r – Y 0.5Y = 200 20r – – Y (1- 0.5) = 200 20r – ½ Y = 200 20r – Y = 400 40r. – Thus IS curve is: Y = 400 40r. – The following equations describe an economy 16 Problem: C = 100 + 0.75Yd I = 50 25r – T = G = 50 Where is aggregate consumption, is disposable income, is aggregate investment. is C Yd I T taxes, is government purchases and is the rate of interest. Derive the curve for the G r IS economy. Solution: Y = C + I + G
12. Why LM slopes upward to the right? This is because with higher levels of income, demand curve for money (Md) is higher and consequently the money market equilibrium (that is, the equality of the given money supply with money demand curve occurs at a higher rate of interest). This means that rate of interest varies directly with income. 13. down the equation for IS curve. Equation for IS curve: Y = 14. Write down the equation for LM curve. Equation for LM curve: r = (kY – ) 15. Problem: The following equations describe an economy: C = 10 + 0.5Y; I = 190 – 20r. Derive the equation for IS curve. Solution: IS describes the equation for product market equilibrium at various combinations of level of income and rate of interest. Y = AD = C + I Y = 10 + 0.5Y + 190 – 20r Y – 0.5Y = 200 – 20r Y (1- 0.5) = 200 – 20r ½ Y = 200 – 20r Y = 400 – 40r. Thus IS curve is: Y = 400 – 40r. 16 Problem: The following equations describe an economy C = 100 + 0.75Yd I = 50 – 25r T = G = 50 Where C is aggregate consumption, Yd is disposable income, I is aggregate investment. T is taxes, G is government purchases and r is the rate of interest. Derive the IS curve for the economy. Solution: Y = C + I + G
chapter-_5_is-_lm_model_econ-_102_2.docx