Question: Consider a model for goods market C=300+5/20Y, I=60+6/20Y-500i and assumethe financial market equilibrium is given by M-P=-80+0.1Y-1000i
(a)solve for the IS curve by expressing the equilibrium level of output as a function of government spending G, and the interest rate i.
(b)solve for the aggregate demand relationship between output,government spending,level of the money stock and the level of prices.
(c)using the IS-LM framework,assume that prices are fixed,P=100,that M=100 and that G=50.Solve for the equilibrium level of output and the interest rate.
(d)The government is unhappy with the equilibrium level of output and wants to increase it to Y=1000 using monetary policy.What is the required change in the level of money stock M?Why such a policy is unfeasible?
(e)The government is unhappy with the equilibrium level of output and wants to increase it to Y=1000 using fiscal policy.What is the required change in the level of government spending G?
(f)Compare your answers to(h) with your answer to (c) and explain.