The following equations describe an economy. Refer to equation (8) on page 247, equation (9) on page 248 and equation (23) on page 212 may also help in 12th edition Dornbusch, Fischer, Startz.
IS Function
C=600+(.7) (1-t) y
t= .15
l = 1500-75 (i)
l = 6 (6%)
G = 1000
LM Function
L=.3Y-65 (i)
M/P = 900
a) What is the equilibrium income level and rate of interest?
b) Suppose there is an increase in t from .15 to .20 . What will be the change in the equilibrium level of income and interest rate?
c) Suppose there is a decrease in government expenditures (G) from 1000 to 800 given the parameters given in part "a" what will be the new equilibrium income leel and interest rate?
d) Suppose there is an increase in the money supply from 900 to 1200 given the parameters given in part "a" what will be the new equilibrium level of income and interest rate?
e) Today Congress and the President are debating the correct economic policy to attain a full employment level of production, price stability and a balanced budget. Here are the 3 proposals:
1. Cut Government expenditures (G) while keeping taxes fixed
2. Increase the tax rate t while keeping government spending G fixed.
3. Increase the tax rate t and decrease government spending G
Given your answer in a - e above, what economic policy would you advise be implemented? Explain your position completely.