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Mankiw_Text_Problem_3a_6e

# Mankiw_Text_Problem_3a_6e - Here C = C(Y-T = 200 0.25(Y-T...

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Mankiw_Text_Problem_3a_6e Part (a). Derive IS-LM function Given the following information, derive the equations for the IS and LM curves. C = 200 + 0.25 (Y-T) (A) I = 200 – 25 r (B) G = 100 (C) T = 100 (D) E = C + I + G We know that in equilibrium E = Y, therefore Y = C + I + G. However, unlike in previous material, investment is now a function of income and interest rate. This means that C = C(Y-T) and I = I(r), which simply states that consumption is a function of disposable income and Investment is a function of interest rate.
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Unformatted text preview: Here, C = C(Y-T) = 200 + 0.25 (Y-T) and I = 200 – 25 r. Now we can proceed to solve the problem. Y = C + I + G Y = 200 + 0.75 (Y-T) + 200 – 25 r + 100 Y = 200 + 0.75 Y – 0.75 T + 200 – 25 r + 100 Y = 200 + 0.75 Y – 0.75 (100) + 200 – 25 r + 100 Y = 425 + 0.25 Y – 25 r Y – 0.75 Y = 425 – 25 r 0.25 Y = 425 – 25 r Y = [1/0.25] [425 – 25 r] Y = [4] [425 – 25 r] Y = 1700 – 100 r {IS Curve} Now you can proceed to graph this function for values of r from 0 to 8....
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