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Question 1 QUESTION 2: IS-LM Consider an economy described by the following equations: \[ \begin{array}{l} C=150+0.8 Y_{d} \\ I=400-700 R \\ N X=300-0.15 Y-500 R \\ \frac{M^{d}}{P}=0.8 Y-2000 R \end{array} \] Government spending is $ \$ 300 $; there is no autonomous tax and the proportional tax rate is $ 25 \% $; the nominal money supply $ \left(\mathrm{M}^{\mathrm{s}}\right) $ is $ \$ 1,000 $; and the predetermined price level is 1.2 . a) Derive the equation for the IS curve. (6 marks) b) Derive the equation for the LM curve. (5 marks) c) Solve for the equilibrium income level and interest rate. (3 marks) d) i) Sketch the IS and LM curves on a graph and indicate the equilibrium income and interest rate found in part c above. (3 marks) ii) Assume now that foresigners reduce their demand for imported goods so that autonomous net exports fall. Represent tris change on the graph that you sketched in part $ i $ above (use $ \mathrm{Y}_{2} $ and $ \mathrm{R}_{2} $ to denote the new levels of income and interest rate respectively). (Total 20 marks)

          Question 1
QUESTION 2: IS-LM
Consider an economy described by the following equations:
\[
\begin{array}{l}
C=150+0.8 Y_{d} \\
I=400-700 R \\
N X=300-0.15 Y-500 R \\
\frac{M^{d}}{P}=0.8 Y-2000 R
\end{array}
\]

Government spending is \( \$ 300 \); there is no autonomous tax and the proportional tax rate is \( 25 \% \); the nominal money supply \( \left(\mathrm{M}^{\mathrm{s}}\right) \) is \( \$ 1,000 \); and the predetermined price level is 1.2 .
a) Derive the equation for the IS curve.
(6 marks)
b) Derive the equation for the LM curve.
(5 marks)
c) Solve for the equilibrium income level and interest rate.
(3 marks)
d) i) Sketch the IS and LM curves on a graph and indicate the equilibrium income and interest rate found in part c above.
(3 marks)
ii) Assume now that foresigners reduce their demand for imported goods so that autonomous net exports fall. Represent tris change on the graph that you sketched in part \( i \) above (use \( \mathrm{Y}_{2} \) and \( \mathrm{R}_{2} \) to denote the new levels of income and interest rate respectively).
(Total 20 marks)

Question 1
QUESTION 2: IS-LM
Consider an economy described by the following equations:

C=150+0.8 Yd

I=400-700 R

N X=300-0.15 Y-500 R
(M^d)/(P)=0.8 Y-2000 R

Government spending is $ 300; there is no autonomous tax and the proportional tax rate is 25 %; the nominal money supply (M^s) is $ 1,000; and the predetermined price level is 1.2 .
a) Derive the equation for the IS curve.
(6 marks)
b) Derive the equation for the LM curve.
(5 marks)
c) Solve for the equilibrium income level and interest rate.
(3 marks)
d) i) Sketch the IS and LM curves on a graph and indicate the equilibrium income and interest rate found in part c above.
(3 marks)
ii) Assume now that foresigners reduce their demand for imported goods so that autonomous net exports fall. Represent tris change on the graph that you sketched in part i above (use Y2 and R2 to denote the new levels of income and interest rate respectively).
(Total 20 marks)

Added by Jennifer R.

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