Download Problem Set on IS-LM Short Run Macro Model of Economy FE 312Q

FE 312Q
Prof. Katherine Smith
Fall 2012
Problem Set on IS-LM
Short Run Macro Model of Economy
1. IS-LM as a policy tool.
Consumption:
Investment:
Government Spending:
Taxes:
Money Supply:
Money Demand :
C=0.8(Y-T)
I=20-0.4R
G=10
T=20
Ms=50
Md=(0.5Y-R)P
a. Find the IS Curve.
b. Find the LM curve assuming the price level is 2.
c. Find the equilibrium interest rate and output demanded.
d. If the Fed decides to increase the money supply to 60, what would be the effects
on output, the interest rate, and the price level assuming the wages are fixed and
the price level is fixed at 2.
e. Find the effects on output, the interest rate, and the price level if money supply
increases to 60 assuming prices are flexible.