Assume a closed economy described by the following equations: C = 300 + 0.6(Y-T) ; I = 500 - 40R; G = 200; T = 200; M = 2800; (M/P)d = 4Y - 100R; SRAS: P = 1; LRAS: Y=1000
a) Find the government purchases multiplier and interpret it. b) Find the tax multiplier and interpret it. c) Find an expression for the IS curve. d) Find an expression for the LM curve. e) Find short run equilibrium level of output, prices, and real interest rate. f) Find the expression for the Aggregate Demand Curve (AD). g) Find the long run equilibrium level of output, prices, and interest rate. h) Suppose that the Congress decides to set government purchases at G = 400. I. Find the new short run equilibrium level of output and real interest rate. i) Using both the IS/LM and AD/AS model, graphically illustrate the SHORT and LONG run impact of the policy implemented on part h) on interest rate, output, unemployment, and price level. Assume that the economy was initially operating at the “natural level of employment”. No computations required.