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Questions › DSE › DSE 2021 › Q38
4 marks, −1Macroeconomics › IS-LM model › Equilibrium and shifts in IS-LMHardabout 3 min

DSE 2021 Question 38: IS-LM model

Consider the economy: C=0.8(1−τ)YC = 0.8(1-\tau)YC=0.8(1−τ)Y, τ=0.25\tau = 0.25τ=0.25, I=900−50rI = 900 - 50rI=900−50r, Gˉ=800\bar{G} = 800Gˉ=800, L=0.25Y−62.5rL = 0.25Y - 62.5rL=0.25Y−62.5r, Mˉ/P=500\bar{M}/P = 500Mˉ/P=500. (Aggregate consumption CCC; tax rate τ\tauτ; income YYY; investment III; interest rate rrr; government expenditure Gˉ\bar{G}Gˉ; money demand LLL; real money supply Mˉ/P\bar{M}/PMˉ/P.) Find the equilibrium rate of interest in this economy.

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Consider the economy: C = 0.8(1-τ)Y, τ = 0.25, I = 900 - 50r, Ḡ = 800, L = 0.25Y - 62.5r, M̄/P = 500. (Aggregate consumption C; tax rate τ; income Y; investment I; interest rate r; government expenditure Ḡ; money demand L; real money supply M̄/P .) Find the equilibrium rate of interest in this economy. (A) r = 5 (B) r = 6 (C) r = 7 (D) r = 8

Also written as: Consider the economy: C = 0.8(1-tau)Y, tau = 0.25, I = 900 - 50r, G_bar = 800, L = 0.25Y - 62.5r, M_bar/P = 500. (Aggregate consumption C; tax rate tau; income Y; investment I; interest rate r; government expenditure G_bar; money demand L; real money supply M_bar/P .) Find the equilibrium rate of interest in this economy.

IS-LM model has come up 137 times in 7 exams since 2004.

What this question tests

This question is on Equilibrium and shifts in IS-LM, part of IS-LM model in Macroeconomics.

Solving for income and the interest rate and tracing what shifts each curve.

TestStop has 18 past-paper questions on this subtopic; the nearest in year are below.

  • IIT JAM 2022 · Q57Product market: C = 300 + 0.8(Y - T), T = 200 + 0.2Y, I₀ = 300, G₀ = 400. Money market: M₀/P = 0.4Y - 200i…
Practise IS-LM modelMore on Equilibrium and shifts in IS-LM

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