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Consider the following IS-LM model for a closed economy:
Consider the following IS-LM model for a closed economy:YD = Y-TC = c0 + c1YDI = b0 + b1Y-b2iM/P = d1Y –d2iwhere G and T are constant; c1+b1<1a) Write down the equations for the IS curve and the LM curve. Solve forequilibrium output. What is the multiplier?b) Using the LM relation from part a), express a new equation for investment (I) as afunction of Y (note: interest rates should be eliminated in this new equation). Forsimplicity, students need not expand Y as derived from part a).c) Under what conditions on the parameters of the model (ie. c0, c1, etc) willinvestment increase when G decreases? If G decreases by one unit, by how muchdoes I increase? (hint: students will need to use part a) and b) to answer this)Question
