Let us consider a hypothetical economy that is described by the equations shown below:
C = 300 + 0.75 YD - 300 r
T = 100 + 0.20 Y
I = 200 - 200 r
L = 0.5 Y - 500 i
YD = Y - T
Where full-employment level of Income ?= 2500; Government Spending G = 600;
Nominal Money Supply M = 133,000; Expected Inflation is πe = 0.05; and the fixed Price Level P = 120.
a. Determine the equation for the IS Curve.
b. Determine the equation for the LM Curve.
c. Find the short-run equilibrium real interest rate and level of income.
d. Determine the equilibrium values for Consumption (C), Taxes (T), Investment (I) and nominal interest rate (i).
e. Determine the long-run equilibrium.
f. Using the IS and LM curves found above, find the equation for the Aggregate Demand (AD) curve. (Hint: Use the LM curve without specifying the value of Price Level, P)