The following equations describe a Keynesian model of the economy: Cd = 500 + 0.5(Y - T) - 100r
Id = 350 - 100r L = 0.5Y - 200i
πe = 0.05, G = T = 200, = 1850
M = 3560
(note: remember the Fisher Equation)
a.Find the full-employment equilibrium values of the real interest rate, consumption, investment, and the price level. This will be at the intersection of IS and LM.
b.Suppose that government purchases rise to 225, with no change in taxes, starting from the equilibrium in part
(a). What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and the price level?