Question: 2. Consider the following structure. Consumption: C = 60 + 0.6Ya Taxes: T = 40 + 0.25Y Transfer Payments: TR = 20 Investment: I= 50/

2. Consider the following structure. Consumption: C = 60 + 0.6Ya

2. Consider the following structure. Consumption: C = 60 + 0.6Ya Taxes: T = 40 + 0.25Y Transfer Payments: TR = 20 Investment: I= 50/ Government Purchases: G = 70 Exports: X = 44 Imports: M = 10 + 0.15Y Money Demand: MD = $p + 0.18 Money Supply: MS = 500 a. (10 points) Solve for the equilibrium level of GDP and equilibrium interest rate, simultaneously. Round the interest rate up to the nearest 100th as 0.149 = 0.15). b. (10 points) Show this equilibrium on a Keynesian cross diagram and a money market diagram. c. (10 points) Figure out the change in the interest rates if the central bank reduces the money supply to 400. Show this contractionary monetary policy measure in the money market diagram. d. (10 points) Next, find the change in the equilibrium GDP in the aftermath of this contractionary monetary policy measure -both algebraically and graphically

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