5. Assume an economy is described by the following equations C = 1500 + 0.8(Y – T) I = 1000 - 40r M = Y – 200r P G = 200

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5 Assume An Economy Is Described By The Following Equations C 1500 0 8 Y T I 1000 40r M Y 200r P G 200 1 (231.72 KiB) Viewed 33 times

5. Assume an economy is described by the following equations C = 1500 + 0.8(Y – T) I = 1000 - 40r M = Y – 200r P G = 2000 T= 2000 M = 8000 P= 4 a. Derive the equations for IS and LM. What are the equilibrium interest rate and level of income? b. Assume taxes are cut by 20%. If the money supply does not change, what is the new equilibrium interest rate and income level? C. In response to the tax cut, assume the central bank adjusts the money supply to hold the interest rate constant. What is the new equilibrium income? What is the new money supply? d. In response to the tax cut, assume the central bank adjusts the money supply to hold income constant. What is the new interest rate? What is the new money supply?