1. You are given the following ISLM information for Mishkinland:
C =100+0.8YD, I=150-20i, G=250, T=250; LM: Ms/P=100, Md/P =Y-80i
(where C=consumption, I =investment, G=government purchases, T=net taxes, i=interest rate in %, Md/P =Demand for money in real terms, Ms/P=real money supply). Note that i is in % in both IS and LM, e.g. if interest rate is 10%, 20i=200.
a) Suppose i=10%.
(i) Calculate the equilibrium level of income in the goods market if i=10 (in percentage as explained above)
(ii) Calculate the equilibrium level of income in the money market if i=10 (in percentage as explained above)
b) Is the economy in equilibrium? If yes, explain, why. If not, find the equilibrium level of Y and i.
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