Answers to Problems in Textbook
1.
a.
The real demand for money at each combination of the interest rate and income is given in the
following table:
Income
Interest rate
11,940
12,000
12,060
12,120
12,180
4.4
2,765
2,780
2,795
2,810
2,825
4.7
2,750
2,765
2,780
2,795
2,810
5.0
2,735
2,750
2,765
2,780
2,795
5.3
2,720
2,735
2.750
2,765
2,780
5.6
2,705
2,720
2.735
2,750
2,765
5.9
2,690
2,705
2.720
2,735
2,750
6.2
2,675
2,690
2,705
2,720
2,735
b. The horizontal axis of your graph should be labeled real money balances, and the vertical axis of
your graph should be labeled interest rate. The points on demand for money curve when income
equals 11,940 are: (2,675, 4.4); (2,750, 4.7); (2,735, 5.0); (2,720, 5.3); (2,705, 5.6); (2,690, 5.9);
and (2,675, 6.2). The points on demand for money curve when income equals 12,180 are:
(2,825, 4.4); (2,810, 4.7); (2,795, 5.0); (2,780, 5.3); (2,765, 5.6); (2,750, 5.9); and (2,735, 6.2).
c. The table in Part a shows that given that the real money supply equals 2,750, the real demand for
money and the real supply of money are equal at the following combinations of real income and
the interest rate: (11,940, 4.7); (12,000, 5.0); (12,060, 5.3); (12,120, 5.6); and (12,180, 5.9). The
horizontal axis of your graph for the
LM
curve should be labeled real income, and the vertical
axis of your graph should be labeled interest rate. The five points on
LM
0
are listed in the first
sentence of this part of the problem.
d. The table in Part a shows that given that the real money supply equals 2,780, the real demand for
money and the real supply of money are equal at the following combinations of real income and
the interest rate: (12,000, 4.4); (12,060, 4.7); (12,120, 5.0); and (12,180, 5.3). The four points on
LM
1
are just listed in the previous sentence of this part of the problem.
e. The table in Part a shows that given that the real money supply equals 2,720, the real demand for
money and the real supply of money are equal at the following combinations of real income and
the interest rate: (11,940, 5.3); (12,000, 5.6); (12,060, 5.9); and (12,120, 6.2). The four points on
LM
2
are just listed in the previous sentence of this part of the problem.
2.
a.
The marginal propensity to save,
s
, equals 1

c
=
1

.6
=
.4. The multiplier,
k
, equals the
inverse of the marginal propensity to save. Therefore, the multiplier equals 1/.4
=
2.5.
b. The equation for autonomous planned spending,
A
p
, equals 2,180

20
r

.6(1,800)
+
2,400

60
r
+
2,000

300
=
5,200

80
r
.
c. The equation for the
IS
curve is
Y
=
kA
p
.
Given the answers to Parts a and b of this problem,
we have that the equation for the
IS
curve is
Y
=
2.5(5,200

80
r
)
=
13,000

200
r
. Given the
interest rate equals 4.7, equilibrium income in the commodity market equals 13,000

200(4.7)
=
12,060. Given the interest rate equals 5.0, equilibrium income in the commodity market equals
13,000

200(5.0)
=
12,000. Given the interest rate equals 5.3, equilibrium income in the