Question #73327

(a) Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on
the right.)
(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.)
Part II: Solve for equilibrium
(c) Solve for the equilibrium real output. (Hint: Substitute the expression for the interest rate given by
the LM equation into the IS equation and solve for output.)
(d) Solve for equilibrium interest rate. (Hint: Substitute the value you obtained for Y in part (c) into
either IS or LM equations and solve for i. If your algebra is correct you should get the same answer
fromn both equations)
(e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I
and G.

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