B06-Tutorial5

# Principles of Macroeconomics (with Xtra!)

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Page 1 of 2 T HE U NIVERSITY OF T ORONTO AT S CARBOROUGH Division of Management ECM B06H – Macroeconomic Theory and Policy: A Mathematical Approach TUTORIAL #5 Q1. Suppose an economy is characterized by the following set of equations: C = 150 + 0.8(Y - T), I = 400 - 20r, G = 50, T = 50, A e = 0, M d = P(0.4Y - 20i), M s = 600, and P = 1. a) Derive and sketch the IS curve. b) Derive and draw the LM curve. c) What are the values of income and the rate(s) of interest in equilibrium? d) The Bank of Canada wishes equilibrium income to be 2500. What change in the money supply (if any) will be required? e) What would be the change in government spending that would be required to attain a level of equilibrium income of 2500 if the money supply were maintained at 600? f) Discuss the effects on the interest rate(s) of policies d) and e).

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