Consider the following IS-LM model: I = 200 + 0.20Y 1000i G = 200 T = 100 L(i, Y) = 2Y 8000i Ms /P = 2000 (a) (2 marks) Assume consumption function
Question

# Consider the following IS-LM model: I = 200 + 0.20Y − 1000i G = 200 T = 100 L(i, Y) = 2Y − 8000i Ms /P = 2000

(a) (2 marks) Assume consumption function is linear, the marginal propensity to consume is 0.6 and the consumption when the the disposable income is zero is 200. What is the consumption function?

(b) (5 marks) Derive the equation for the IS curve. Explain the meaning of the IS curve. resents

(c) (5 marks) Derive the equation for the LM curve. Explain the meaning of the LM curve.

(d) (2 marks) Solve for equilibrium real output and interest rate.

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