Suppose the following model of the economy, with the price level fixed at the 1.0:
I = 800 ? 20r, T = 1000, G = 1000,
C = 0.8(Y ? T), Ms = 1200, Md/P = 0.4Y ? 40r,
Where Ms and Md are nominal supply of money and the nominal demand for money.
1. Write down a formula for the IS curve, showing Y as a function of r alone.
2. Write down a formula for the LM curve, showing Y as a function of r alone.
3. Calculate the short-run equilibrium values Y, r, Y d, C, I, S, Spub, and national saving?
4. Suppose G increases by 200. By how much will Y increase in short-run equilibrium? Calculate the government purchases multiplier?
5. Suppose that G is back at its original level, butMs increases by 200. By how much will Y increase in short-run equilibrium? Determine the multiplier for the money supply?