The following equations describe an economy.
Y = C + I + G.
C = 120 + 0.5(Y - T ).
I = 100 - 10r. G = 50. T = 40.
(M/P)= Y - 20r. M= 600. P = 2.
a. Derive the equations for IS and LM curves.
b. Find the equilibrium level of income and the equilibrium interest rate.
c. Suppose government expenditure increases by 50%. Find the equilibrium interest rate and income.
d. After the government fiscal policy action described in c., what action can the Fed take to mitigate an interest rate hike? Depict this on the IS-LM graph. What variable can the Fed change and by how much? Compute the equilibrium income and interest rate when the Fed responds to the fiscal policy action in c.