Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is Id = 10 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are pe = 0.05, G = 200, = 1000, and M = 2100.
(a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level.
(b) Suppose the money supply increases to 2800. Find the equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged.)
(c) Assume tougher immigration laws reduce the working-age population..
Use the IS-LM model to determine the effects on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level. For full credit you must draw the graph and explain in words.