Question: 2. Consider the following IS-LM model. The IS equation is i =b - dy , where b > 0 and d > 0 are parameters.

2. Consider the following IS-LM model. The IS equation is i =b - dy , where b > 0 and d > 0 are parameters. The money-demand equation is where a > 0 is a parameter. The money-supply equation is MS = H where o E (0, 1) is a parameter. (a) Solve this model and find algebraic expressions for equilibrium out- put and interest rate. (10 points) (b) Show the equilibrium of the model in the IS-LM and the money- market diagrams. (10 points) (c) What happens to equilibrium output and interest rate if parameter a increases. (2 points) Show the effects of an increase in parame- ter a in the IS-LM and the money-market diagrams (You may use the same diagrams as in part (b)). (6 points) Briefly explain the changes. (2 points)

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