4. Assume an economy given by the following equations C = 500 + 0.75(Y – T) I = 1000 – 100r M = Y - 300r P G = 1000 T =

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4 Assume An Economy Given By The Following Equations C 500 0 75 Y T I 1000 100r M Y 300r P G 1000 T 1 (92.51 KiB) Viewed 28 times

4. Assume an economy given by the following equations C = 500 + 0.75(Y – T) I = 1000 – 100r M = Y - 300r P G = 1000 T = 1000 M = 5000 P= 5 Derive the equations for the IS and LM curve. Find the equilibrium interest rate and income level. a. b. Suppose government purchases increase from 1000 to 1200. What are the new equilibrium interest rate and income levels? Ifr had not changed, what would the new income level have been? C. Suppose that, instead, the money supply decreases from 5000 to 4500. How does the LM curve shift? What are the new equilibrium interest rate and income? If Y had not changed, what would the new r have been? d. With the initial values for monetary and fiscal policy, suppose the price level falls from 5 to 2.5. What happens? What are the new equilibrium interest rate and income?