Consider the following IS-LM model: C = 200 + 0.25YD
= 150 + 0.25Y - 1000i
G = 250
T = 200
(M/P)d = 2Y - 8000i
M/P = 1600
a) Derive the IS relation. (Hint: you want an equation with Y on the left side and everything else on the right)
b) Derive the LM relation. (Hint: it will be convenient for later use to rewrite this equation with i on the left side and everything else on the right)
c) Solve the equilibrium for real output. (Hint: Substitute the expression for the interest rate given by the LM equation into the IS equation and solve for output)
d) Solve the equilibrium interest rate. (Hint: Substitute the value you've obtained for your Y in part (c) into either the IS or LM equations and solve for i . If your algebra is correct you should get the same answers in both eqautions.)
e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G
f) Now suppose that the money supply increases to M/P = 1840. Solve for Y, i, c and T, and describe in words the effects of an expansionary monetary policy.
g) Set M/P equal to its initial value of 1600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, i, and C.