1. Consider the following model and again answer related questions.
1. Y = C + I + G + X - M
2. C = 300 + 0.50Y
3. I = 600 - 1000r
4. G = 200
5. X = 100
6. M = 100 + 0.25Y
a. How much is equilibrium level of income or output if Fed decides to set the rate of interest at 10 percent (r=0.10).
b. In an effort to cool down the economy, the Fed raises the rate of interest to r =0.15. By how much will Y change?
c. To coordinate the fiscal and monetary policies, assume government decides to balance the budget by cutting its spending by 100 and at the same time Fed decides to counter the contractionary effect of cutting spending and lowers the rate of interest to r = 0.05. Can you predict the change in Y?