ECON2123+PS2-fa13

B suppose a central bank bought a 10000 bond from the

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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 IS-LM Model (Chapter 5) (55 marks) 1. Now consider the following IS-LM 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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