Question: a) You are given the following information about the commodity and Money markets of a closed economy without government intervention. The commodity market Consumption

a) You are given the following information about the commodity and Money

a) You are given the following information about the commodity and Money markets of a closed economy without government intervention. The commodity market Consumption function: C 100+ 0.3Y Investment function: The Money Market Demand for Money I = 2000-2.1r Precautionary and Transactions demand for money: Speculative demand for money: Money supply; Required: i. Derive the IS curve ii. Derive the LM curve. iii. Derive the equilibrium level of income and rate of interest MDT = 0.2 Y Mps = 10-2r = Ms 1500 iv. If the money supply is increased by 50, what would be the effect on the equilibrium level of income and rate of interest (10 marks) b) Based on the circular flow of income analysis, explain why marginal propensity to consumer plus marginal propensity to save equals one and what is the relationship between the simple multiplier and marginal propensity to consume? (5 marks)

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