Gallaway
ECO 385

Homework #1

All homework should have a cover page indicating the student's name, class, and row number. All homework assignments should be typed.  Math  and graphs can be handwritten if done very neatly.  For mathematical questions, students should show their work by including, at a minimum, all relevant formulas or equations and these same formulas with key variables plugged in.  Final answers should be indicated by placing a circle or box around them.

1. Given C = 200 + .75(Y-T), I = 200 - 25 r, G = T = 100,

   a)  Derive the  IS curve mathematically, then draw it by plotting points the equilibrium Y values  for r = 0 to 8.

   b) Given (M/P)^D = Y -100r  M= 1,000, P = 2

   •  Derive the  LM curve.  Then graph it by plotting Y values for the interest rate between 0 & 8  like above.

   c) Set IS and LM equal to each other and find r* & Y*

   d) If G increased  from 100 to 150, how much does IS shift? What are the new values for Y, r, S, C, and I?

   e) If, instead, the money supply increases by 200 what would be the new values for Y & r?