Dse 2011

[Aish]

Please help with these questions.

[mrittik]

IS curve: Y=C+I+G=>Y=Co + c1 (Y-T) + Io + i1r + G
LM Curve: M=mo + m1Y + m2r

at Eqm: IS=LM=> Y(1-c1)=Co + Io -c1T + i1 (M-mo-m1Y/m2) + G
                        => Y(1-c1 + m1/m2)=Co + Io -c1T + i1 (M-mo) + G
From the eqn it clearly reveals that IS is downward sloping & LM is upward sloping. So increase in G it necessarily reduce I because r increases.

The more -ve m2 means LM becomes flatter-so increase in G has very small effect on r.

c1 is close to 1 means IS curve becomes flatter, so increase in M has very small -ve effect on r.

i think now u can understand the thing. draw the curve as I mentioned, you easily get the solution by ur own.