# Midterm 2 answer key - NAME (IN BLOCK LETTERS): _ Professor...

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NAME (IN BLOCK LETTERS): ___________________________________________________________ Econ 1110, Spring 2008, Midterm 2 Professor Ted Temzelides 2 QUESTION I: IS-LM (25 Points) Consider an economy with the following data: C = 1000 – T + 0.6Y - 200r I = 1000 - 300r G = 1000 T = 0.1Y L = 0.6Y -600(r+ π e ) Μ = 6000 π e = 0 5000 = Y a) (7 Points) Derive the IS curve. [Express it in the form r = f(Y) ] Solution: C+I+G=Y. Substituting and solving for r as a function of Y gives: r = 6 -0.001Y b) (7 Points) Derive the LM curve as a function of Y and M/P . [Express it in the form r = f(Y,M/P) ] Solution: Set M/P=L and solve for r as a function of Y. The solution is: r = 0.001Y -0.001666667M/P c) (11 Points) Derive the short run equilibrium output and real interest rate assuming
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## This homework help was uploaded on 04/15/2008 for the course ECON 1110 taught by Professor Tedloch-temzelides during the Spring '08 term at Pittsburgh.

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Midterm 2 answer key - NAME (IN BLOCK LETTERS): _ Professor...

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