Econ 61 – Macroeconomics

Assignment

1. Given:

C = 1200 + 0.8YD
t = 0.15
I = 900 - 50i
G = 800
TR = 200
L = 0.25 Y - 62.5i
M/P = 550

a. Derive the IS equation

b. Derive the LM equation
c. Solve for the equilibrium level of income
d. Determine the equilibrium rate of interest
e. Solve for the budget surplus
f. Suppose the government undertakes an expansionary policy by increasing its
spending by 200, by how much will equilibrium income and interest rate change?
Graphically show the changes (properly label the graph).
g. Suppose from the initial position, the Central Bank reduces the reserve requirement to
target an increase in the supply of real balances by 50, what is the new equilibrium
level of income? What is the new rate of interest? Graphically show the changes
(properly label the graph).

2. From the same data in #1, determine the effect of an increase in tax rate by 5% on
equilibrium income and interest rate. Graphically show the changes (properly label the
graph).