Consider a closed economy, where the price level P is constant and equal to 4.You are given the following additional information:
C = 1,000 + 0.8(Y - T)
T = 0.25Y - 100
I = 3,000 - 1,000r
G = 500
L = 20,000r
M = 6,400
A.What is the equilibrium level of income? What is the equilibrium level of the interest rate? Explain how you obtained your answers.
B. The public increases its demand for money such that L = 30,000r. The Bank of Canada responds by increasing the money supply such that M = 9,600. What is the equilibrium level of income? What is the equilibrium level of the interest rate? Explain how you obtained your answers.
C. Compare the equilibrium level of income for Part A with the equilibrium level of income for Part B. Explain why this result has occurred.