Question: 1. Consider the following IS-LM model with prices fixed at P = 1 (we are in the short run): Md Y-r P = 1+0.5Y I

1. Consider the following IS-LM model with prices fixed at P = 1 (we are in the short run): Md Y-r P = 1+0.5Y I = 1-0.5r G G Y C+I+G M = P MS Md MS P p , with = P P if r > 0 r Te 0 (a) Explain the minimum value that the real interest rate, r, can take. (b) Derive the IS curve. (c) Write down the LM curve. (d) What are the equilibrium interest rate and output level in the economy? What is the condition for the equilibrium interest rate to be positive

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