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Calculate equilibrium Y and equilibrium r

Chemistry

ScanSolve AI Answer

Answer

r=2r = \text{2}

Y=4750Y = \text{4750}

Step-by-step solution

3 steps

Here's how to calculate the equilibrium Y and r:

  1. Derive the IS curve (Goods Market Equilibrium)

    The goods market equilibrium is given by the equation:

    Y=C+I+GY = C + I + G

    We are given:
    C=1000+0.75YdC = 1000 + 0.75 Y^d
    I=1000−100rI = 1000 - 100r
    G=100G = 100
    T=0.2YT = 0.2Y

    First, calculate disposable income (YdY^d):

    Yd=Y−T=Y−0.2Y=0.8YY^d = Y - T = Y - 0.2Y = 0.8Y

    Substitute YdY^d into the consumption function:

    C=1000+0.75(0.8Y)=1000+0.6YC = 1000 + 0.75(0.8Y) = 1000 + 0.6Y

    Now substitute C, I, and G into the goods market equilibrium equation:

    Y=(1000+0.6Y)+(1000−100r)+100Y = (1000 + 0.6Y) + (1000 - 100r) + 100 Y=2100+0.6Y−100rY = 2100 + 0.6Y - 100r

    Rearrange to solve for Y:

    Y−0.6Y=2100−100rY - 0.6Y = 2100 - 100r 0.4Y=2100−100r0.4Y = 2100 - 100r Y=21000.4−1000.4rY = \frac{2100}{0.4} - \frac{100}{0.4}r Y=5250−250r(IS curve)Y = 5250 - 250r \quad \text{(IS curve)}
  2. Derive the LM curve (Money Market Equilibrium)

    The money market equilibrium is given by the equation:

    Ms=L1+L2M_s = L_1 + L_2

    We are given:
    L1=YL_1 = Y
    L2=1−1000rL_2 = 1 - 1000r
    Ms=2751M_s = 2751 (Assuming the 'I' is a typo and Ms=2751M_s = 2751)

    Substitute L1L_1, L2L_2, and MsM_s into the money market equilibrium equation:

    2751=Y+(1−1000r)2751 = Y + (1 - 1000r) 2751=Y+1−1000r2751 = Y + 1 - 1000r

    Rearrange to solve for Y:

    Y=2751−1+1000rY = 2751 - 1 + 1000r Y=2750+1000r(LM curve)Y = 2750 + 1000r \quad \text{(LM curve)}
  3. Solve for Equilibrium Y and r

    Now we have a system of two equations:

    1. Y=5250−250rY = 5250 - 250r (IS curve)
    2. Y=2750+1000rY = 2750 + 1000r (LM curve)

    Set the two expressions for Y equal to each other to find r:

    5250−250r=2750+1000r5250 - 250r = 2750 + 1000r 5250−2750=1000r+250r5250 - 2750 = 1000r + 250r 2500=1250r2500 = 1250r r=25001250r = \frac{2500}{1250} r=2r = 2

    Substitute the equilibrium value of r back into either the IS or LM equation to find Y. Using the IS curve:

    Y=5250−250(2)Y = 5250 - 250(2) Y=5250−500Y = 5250 - 500 Y=4750Y = 4750

    The equilibrium values are:
    Equilibrium interest rate r=2r = \boxed{\text{2}}
    Equilibrium output Y=4750Y = \boxed{\text{4750}}

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