# Homework2 - EC 302 Intermediate Macroeconomics Antonio...

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EC 302 – Intermediate Macroeconomics Antonio Doblas-Madrid, Ph.D. The ISLM /ADAS Model - Page 1 of 2 - HOMEWORK 2 Due Wednesday, March 30 th , 2016 by 4:20pm. Please turn in your handwritten answers in class, or upload electronic version to d2l Dropbox. Liquidity Trap in the IS-LM Model (50 points) Consider a closed economy in which output is the sum of consumption, investment and government purchases Y = C + I + G, and where C, I and G are respectively given by C = 5000 – 3000 r + 0.8Y, I = 2500 – 5000 r, and G = 2500. (a) (5 points) Recalling that national savings equals S = Y – C – G, find an equation relating savings S to Y and r. (b) (5 points) Find an analytical formula for the IS curve. To do this, set savings (which depends on Y and r) equal to investment (which depends on r), and solve for Y as a function of r. Depict the IS curve graphically. In your graph, where the IS curve intersect the Y axis? And the r axis? (c) (5 points) Suppose that money market equilibrium is given by M/P = 3,000 + 0.1 Y – 16,000i, where the nominal interest rate i is the real interest rate r plus expected inflation. Assume for

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