If the is curve is given by y = 1,700 – 100r, the money demand function is given by (m/p)d = y – 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by what number?

The equilibrium income increases by 50.

Explanation:

The IS curve is given by Y = 1,700 - 100r

The money demand function is given as (M/P)d = Y - 100r

The money supply is 1,000.

The price level is 2.

Putting value of Y in money demand function.

1,000/2 = Y - 100r

500 =  1,700 - 100r - 100r

1700 - 500 = 200r

r = 1200\200

r = 6%

Putting value of r = 6% in IS curve equation

Y = 1,700 - 100r

Y = 1,700 - 600

Y = 1,100

Now, if the money supply is increased to 1,200.

Putting value of Y in money demand function.

1,200/2 = Y - 100r

600 =  1,700 - 100r - 100r

1700 - 600 = 200r

r = 1100\200

r = 5.5%

Putting value of r = 5.5% in IS curve equation

Y = 1,700 - 100r

Y = 1,700 - 550

Y = 1,150

So, we see that on increasing money supply from 1,000 to 1,200 the income increase by 50 and rate of interest falls by 0.5 percent.

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