Question #73325

The Goods Market & The Financial Markets : The IS-LM Model
Suppose that the economy of Biscuitville is characterized by the following goods market behavioural
equations:
C = 200 + 0:25YD
I = 150 + 0:25Y - 1000i
G = 250
T = 200
where there is only one good produced and consumed in the economy: biscuits! Suppose additionally that
nancial markets are characterized by the following equations:
(M=P)d = 2Y - 8000i
M=P = 1600

Expert's answer

1600 = (M=P) = 2Y – 8000i

i = - 0.2 + 0.00025Y

Y = (C – T) + I +G

Y = (200 + 0,25YD – 200) + 150 + 0.25Y – 1000( - 0.2 + 0.00025Y ) + 250

Y = 0.25Y + 600

0.75Y = 600

Y = 800.

i = - 0.2 + 0.00025Y

Y = (C – T) + I +G

Y = (200 + 0,25YD – 200) + 150 + 0.25Y – 1000( - 0.2 + 0.00025Y ) + 250

Y = 0.25Y + 600

0.75Y = 600

Y = 800.

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