A simplified model of the economy of Finland is described as follows:

Desired consumption Desired investment

\(C^{d}=100+0.5(Y-T)-50 r\).

Real money demand Full-employment output

\(I^{d}=150-50 r\).

\(L=0.5 Y-100 i\).

Expected inflation \(\quad \pi^{e}=0.02\).

In this economy, the government always has a balanced budget, so \(T=G\), where \(T\) is total taxes collected.

a. Suppose that \(M=1400\) and \(G=280\). Use the classical IS-LM model to find the equilibrium values of output, the real interest rate, the price level, consumption, and investment. In the classical model, output always equals its full employment level.

b. The money supply rises to 1540 . Repeat part (a). Is money neutral?

c. With the money supply back at 1400 , government purchases and taxes rise to 350 . Repeat part (a). Assume for simplicity that \(\bar{Y}\) is fixed (unaffected by \(G\) ). Is fiscal policy neutral in this case? Explain.