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?

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Business

Lamont Kim

13 October, 14:37

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?

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Answers (1)

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Leyla Nguyen · Answer 1

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.