Handout 8 Key

Handout 8 Key - Econ 3140-2 Fall 2009 Handout#8 Answer Key...

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Econ 3140-2 Fall 2009 Handout #8 Answer Key 1. (a) The IS curve is found from the equation Y = C d + I d + G = 130+0 : 5 ( Y 100) 500 r + 100 500 r + 100 ,so Y = 560 2000 r . The LM curve comes from the equation M P = L , which in this case is 1320 P = 0 : 5 Y 1000 r , so Y = 2640 P + 2000 r . (b) At full employment, Y = 500 . Using this in the IS curve gives 500 = 560 2000 r , which has the solution r = 0 : 03 . Plugging the values for Y and r in the LM curve gives 500 = 2640 P ± + (2000 ± 0 : 03) , 440 = 2640 P , which has the solution P = 6 . Then consumption is C = 130 + 0 : 5( Y 100) 500 r , 130 + 0 : 5 ± (500 100) (500 ± 0 : 03) = 315 . Investment is I = 100 (500 ± 0 : 03) = 85 . (c) If desired investment increases to 200 500 r , the m curve shifts from IS 1 to IS 2 Y = C d + I d + G = 130+0 : 5 ( Y 100) 500 r +200 500 r +10 , so Y = 760 2000 r . In the short run, 6
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This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell.

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Handout 8 Key - Econ 3140-2 Fall 2009 Handout#8 Answer Key...

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