Q 20 p 05p7 q2 100 2 p2

(a) Comment on the relationship between the three goods on the demand side.

fb) What is the nature of any production externality on the supply side? (c) Solve for the equilibrium prices and quantities of the three goods.

5. An economy has an IS curve given by r = 210-2)' and an LM curve given by r = —m + y / 4. The long-run equilibrium level of output must equal 100. What value of M makes the IS and LM curves intersect at Y - 100? What is the economic interpretation of a situation in which M exceeds this critical amount? What is the economic interpretation of a situation in which M is less than this critical amount?

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