This preview shows pages 1–2. Sign up to view the full content.

Economics 302 Name ______________________________ Answers to Quiz #4 Section Number ______________________ 5/3/07 Student ID Number ___________________ You are given the following information about a closed economy. Y = C + S + T Y = E in equilibrium C = a + b(Y – T) = 320 + .5(Y – T) r = 10 – (0.1)I G = 100 M S = nominal money supply = 400 (M/P) D = demand for real money balances is expressed by the following equation: r = (.1)Y – 72 – (.01)(M/P) D P = 1 initially T = (.2)Y 1. Using the above information, derive the IS equation for this economy. In your derivation indicate your reasoning: i.e., what underlies this equation? a. (.25 points) Explanation underlying your derivation of the IS curve: The IS equation expresses all the Y, r combinations that depict goods market equilibria where production equals expenditure. b. (.25 points) Derivation of the IS curve: Y = E in equilibrium Y = C + I + G Y = 320 + .5(Y – T) + 100 -10r + 100 Y = 520 + .5(Y - .2Y) – 10r Y = 520 + .4Y – 10r

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}