The following equations describe the economy. C= 100+ 0.8 Y
I = 200- 1000 i
L = Y - 10000 i
Initially, government expenditure is $550, and taxes are $500. The real money supply
equals $900.
2. Derive the formulas for the IS curve and LM curve.
b. What are the initial levels of GDP, the interest rate, consumption, and investment?
Owing to a drop in investor confidence, the autonomous component of investment
drops by 90.
c. By how much do income, the interest rate, and investment drop?
d. By how much should the inoney supply be changed in order to return GDP to its
original level? What will the new interest rate be?
e. Draw three graphs to illustrate the equilibria in b, c, and d.​