The following relationships describe the economy of a random, fictitous country:
Y = C + I (Income Identity)
C = 90+0.9Y (Consumption)
I = 900-900R (Investment)
M = (0.9Y-900R) * P (Money demand)
Y= Output , C=Consumption, I = investment, R = interest rate, M = money supply, P = price level. No taxes, government spending, or foreign trade.
The Price Level is 1. The Money Supply is 900 for the year 1998.
a. Sketch the IS curve and LM curve for 1998 on a diagram and show the point where the interest rate and output are determined. Show what happens in the diagram if the money supply is increased above 900 in 1998.
b. Sketch the aggregate demand curve. Show what happens in the diagram if the money supply is decreased below 900 in 1998.
c. Derive an algebraic expression for the aggregate demand curve in which P is on the left hand side and Y is on the rigth hand side.
d. What are the values of output and the interest rate in 1998 when the money supply is 900?