Economics 100B
Professor K. Kletzer
UCSC
Fall 2008
Problem Set 2
Due at the beginning of lecture, Friday, October 17
1.
Consider the following ISLM model:
C = 1200 + 0.9 Y
d
I = 0.2 Y – 20,000 i
G = 2000
T = (1/3) Y
(M/P)
d
= Y – 100,000 i
M/P = 6000
(a) Derive the equation for the IS curve (it will be easiest if you write this with Y on the lefthand
side and all else on the righthand side).
(b) Derive the equation for the LM curve (again, put Y on the lefthand side).
(c) Solve for the equilibrium interest rate (note that 0.01 is 1%).
(d) Solve for equilibrium real output.
(e) Solve for the equilibrium values of C and I.
Verify that your answer for Y is correct by adding C,
I and G together.
2.
Use the IS and LM curves that you derived for Problem 1 to answer the following.
(a) Calculate the changes in Y and i if G increases by 400.
Calculate the change in I.
Explain the
effects of expansionary fiscal policy using your results to illustrate.
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 Spring '07
 YiSun
 Macroeconomics, Fiscal Policy, ISLM Model, Monetary Policy, Liquidity preference, equilibrium real output

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