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Unformatted text preview: of investment and the equilibrium Y again and show the changes on the graph from part a). d) Draw a graph of the relationship between r and Y resulting from parts b) and c). How do we call this curve? e) Suppose now that at the given real interest rate r=0.02 the government increases its spending by 100 to G=300. Show graphically the resulting changes in the AE and the IS curve and explain in words. 3. Suppose that the following equations describe an economy: C=170+0.6Y I=1004r G=350 Md/P=0.75Y6r Ms/P=735 a) Derive the equation for the IS curve by setting Y=AE=C+I+G. b) Derive the equation for the LM curve by setting Ms/P=Md/P. c) Calculate the equilibrium levels of Y and r by setting IS=LM. d) If the Fed decides to use expansionary monetary policy, so that Ms increases, what will happen in the IS/LM Model? Explain and show graphically....
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 Spring '08
 Mcnertney
 Macroeconomics, Inflation, Monetary Policy, Liquidity preference, IS/LM model

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