Y = C + I (Income Identity)
C = 90+0.9Y (Consumption)
I = 900-900R (Investment)
M = (0.9Y-900R) * P (Money demand)
Y= Output , C=Consumption, I = investment, R = interest rate, M = money supply, P = price level. No taxes, government spending, or foreign trade.
The Price Level is 1. The Money Supply is 900 for the year 1998
a. What are the values of the output and the interest rate in 1999 when the money supply is 900?
b. Sketch the AD curve and show what happens when the money supply is decreased below 900 in 1998.