(consumption) (investment) (government spending)

L = kY — ItR (money demand) M — M (money supply/

where R and Y are the interest rate and real GDP, respectively, and a > 0, 0 </> < 1,0 < / < >0. and// > Oare known constants. Find an expression lor the linear IS curve and an expression lor the linear LM curve. Then lind algebraic solutions for R and >'

5. In the two-market model in equations ( 7.9) and (7.10). what is the interpretation of the coefficient ff2\ being positive? Give an economic example of this kind of relationship.

f>. There are two markets for goods that are regarded as substitutes and their supply and demand curves are given by q\ =2Pl, q'{ = 20 - +Pi (good 1)

Find the equilibrium prices and quantities of the two goods. 7. An economy has IS and LM curves given by

0 0

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