Assume the following model of the economy, with the price level fixed at 1.0:
C = 0.8(Y ? T), Ms = 1200, Md/P = 0.4Y ? 40r,
I = 800 ? 20r, T = 1000, G = 1000,
where Ms and Md are the nominal supply of money and nominal demand for money.
(a) Write a formula for the IS curve, showing Y as a function of r alone.
(b) Write a formula for the LM curve, showing Y as a function of r alone.
(c) What are the short-run equilibrium values Y , r, Y d, C, I, S, Spub, and national saving?
(d) Assume G increases by 200. By how much will Y increase in short-run equilibrium? What is the government purchases multiplier?
(e) Assume that G is back at its original level, but Ms Increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for the money supply?