ANS) Given

Y = C + I

C = 1000 + 0.8Y

I = 2000 – 0.75r

a) (i) IS Equation:

Equilibrium condition-

Y(output)= AD (Aggregate demand)

Where, AD = C +I

So,

Y = C +I

Put the given C,and I function

Y = 1000 + 0.8Y + 2000 – 0.75r

Y - 0.8Y = 3000 – 0.75r

0.2Y = 3000 – 0.75r

Y = 15000 - 3.75r ---------------------------------------------Required IS equation

Hence, the required IS equation would be, Y =15000 - 3.75r

LM EQUATION

AS GIVEN,

Lt = 0.25Y (Transactions and precautionary demand for money function)

Ls = 1000 – 0.5r (Speculative demand for money function)

Ms = 3200 (Money supply function)

Money demand function =  0.25Y (Transactions and precautionary demand for money function) +  1000 – 0.5r (Speculative demand for money function)

Money demand function = 0.25Y + 1000 - 0.5r

Equilibrium condition-

Money demand function = Money supply function

0.25Y + 1000 - 0.5r = 3200

0.25Y = 2200 + 0.5r

Y = 8800 + 2r....................................................................-Required LM equation

(ii) equilibrium level of Interest rate

put Y = 15000 - 3.75r in LM equation

15000 - 3.75r = 8800 + 2r

6200 = 5.75r

r = 1078.26..................is the required level of Interest rate

put r = 1078.26 in Y = 15000 - 3.75r

Y = 15000 - 3.75 ( 1078.26)

Y = 15000 - 4043.475

Y = 10,956.525.....................is the reqired equilibrium level of income

(iii) If the money supply is increased by 80, then money supply function = 3280

Money demand function = 0.25Y + 1000 - 0.5r

Equilibrium condition-

Money demand function = Money supply function

0.25Y + 1000 - 0.5r = 3280

0.25Y = 2280 + 0.5r

Y = 9120 + 2r....................................................................-Required New LM equation

NOW

put Y = 15000 - 3.75r in LM equation

15000 - 3.75r = 9120 + 2r

5880 = 5.75r

r = 1022.61..................is the required level of Interest rate

put r = 1022.61 in  Y = 15000 - 3.75r

Y= 15000 - 3.75 ( 1022.61)

Y = 15000 - 3834.787

Y = 11,165.213 ....................is the reqired equilibrium level of income