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Unformatted text preview: l bank bought a $10,000 bond from the public (an y nonbank), and that nonbank
seller of bonds keeps the proceeds as cash. What happens to the central bank’s balance sheet? What
happens to the nonbank’s balance sheet? Part III: The ISLM Model (Chapter 5) (55 marks)
1. Now consider the following ISLM model: (20 marks)
C = 200 +0.25 YD
I = 150 + 0.25 Y  1000 i
G = 250
T = 200
(M/P)d = 2 Y 8000 i
(M/P)s = 1600
(a) Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on
the right). (2 marks)
(b) Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equation with i on
the left side and everything else on the right.) (2 marks)
(c) Solve for equilibrium real output. (Hint: Substitute the expression for the interest rate given by the
LM equation into the IS equation and solve for output.) (2 marks)
(d)...
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 Fall '13

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