Consider a closed economy that can be represented by thefollowing equations:
C(r) = 116+0.7(Y -T)-150r
I(r) = 25 - 625r
G =300 (6)
T = 300
(Md /P) = Y /(80 + 50r)
For parts (a) and (b) assume M = 100 and for parts (a) and (c)assume Y = 1000
(a) Find the long-run values of r, C, I, P and V (velocity). Showyour calculations.
(b) An oil shock reduces full employment output to Y = 974.16. Usean IS-LM diagram to explain what is happening and then calculatethe long-run values of r, C, I, P and V .
(c) Ignore part (b) and assume that the government decides toreduce spending and taxes and so G = T = 274.16. What value mustthe central bank set for M in order to keep the price levelconstant following the government downsizing? Illustrate what ishappening with an IS-LM diagram and calculate the new values of r,C, I, P and V .