An economy has IS and LM curves given by...
R = 25 - 2Y
R = -10 + (M/2) + Y

where R is the interest rate (percent), Y is GNP ($ billions), and M is the money supply.

a) The government has a target for GNP of $7.5 billion. What level of money supply will achieve this and what is the resulting interest rate?
b) The world interest rate is R^w = 12 and there is perfect capital mobility. What is the overall equilibrium? What has gone wrong?

Question

An economy has IS and LM curves given by...
R = 25 - 2Y
R = -10 + (M/2) + Y

where R is the interest rate (percent), Y is GNP ($ billions), and M is the money supply.

a) The government has a target for GNP of $7.5 billion. What level of money supply will achieve this and what is the resulting interest rate?
b) The world interest rate is R^w = 12 and there is perfect capital mobility. What is the overall equilibrium? What has gone wrong?