The following equations describe an economy (imagine that C, I, G, etc., can be expressed in billions of pesos and i in percentage; an interest rate of 5 percent means that i = 5).
C = 0.9(1-t)Y; t = 0.25; I = 900 – 50i; G=800; NX = 100; L = 0.25Y – 62.5i; M/P = 500
a) Obtain the equation of the IS curve, from Y = C + I + G +XN. Where Y will be a function of i.
b) Obtain the equation of the LM curve, setting M/P = L equal. Obtain Y as a function of i.
c) Calculate the equilibrium interest, i*. Equating the equation of the IS curve with that of the LM curve, from items a) and b).
d) Calculate the equilibrium income, Y*, substituting i* in the equation of the IS and/or LM curve.
e) Calculate the consumption.
f) Calculate the Investment.