ECON 102 - UCLA - Summer 2020

Exercises Lecture 3 - Welcome to ECON 102!1

This note includes exercises related to the material studied in Lecture 3.

Problem
Consider the following numerical example of the IS/LM model:

C = 200 + 0.25YD
I = 150 + 0.25Y − 1000i
G = 250
T = 200
ī = 0.05
YD = Y − T

1. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything
else on the right.)

2. What happens if the interest rate is 5%. How is that decision represented in the equations?

3. Solve for C and I using ī = 0.05 and verify the value you obtained for Y by adding C, I, and
G.

4. Now assume that the central bank only controls the interest rate. Derive the LM curve and
the amount of money (in real terms, M/P ) in the economy if we know that the demand for
money follows this equation:

(M d /P ) = 2Y − 8000i

Solve for the equilibrium interest rate and output. Plot the equilibrium.

5. What’s the impact of reducing the interest rate to 3% (i0 = 0.03)? How does this change
the LM curve? Solve for Y , I, and C, and describe in words the effects of an expansionary
monetary policy. What is the new equilibrium value of M/P ? Graph and explain.

6. Return to the initial situation in which the interest rate is 5%. Now suppose that government
spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y ,
I, and C. What is the effect of the expansionary fiscal policy on the interest rates and money
supply? Assume that the monetary authority reacts to keep the interest rates fixed at 5%.
Graph and explain.
1
All mistakes are mine. Please email me if you find any at alvaro.boitier@ucla.edu

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ECON 102 - UCLA - Summer 2020

Problem 2
Read/Listen to the following article/podcast about money: Link. Answer the following questions:

1. What is the difference between representative money and fiat money?

2. What are the desirable characteristics a good must have to be used as money?

3. Read this other article about Bitcoin Link. Why the author claims that Bitcoin can be
considered money?

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