You are given the following information regarding a hypothetical economy: 

Suppose that the consumption function is C=0+0.8(Y-T).

 Investment is I=9-75i Taxes are 

1.6 Government expenditures are 

1.5. The demand for real money is M/P=10+0.2Y-100i. The real stock of money is 1.5. 

Answer the following questions: 

a. Derive the IS Curve

 b. Derive the LM Curve

 c. What are the equilibrium output and interest rate? 

d. What is the level of consumption and investment? Do consumption, investment and government expenditures add up to the level of output? 

e. Calculate the money demand.

 f. Suppose the government increases expenditures by 1 unit. What is the effect on output, interest rates, consumption and investment? What is the impact on LM curve? What is the impact on IS curve? Explain verbally and graphically.

Answer rating: 100% (QA)

Ans C 08YT InvestmentI 975i Tax 16 Govt Expenditure 15 Money demand MP 1002Y100i Real stock of money... View the full answer