An economy is initially described by the following equations C = 500 +0.50(Y-T) 1 = 500-25r...

 

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An economy is initially described by the following equations C = 500 +0.50(Y-T) 1 = 500-25r d =Y - 25r G = 100 T = 500 M = 2000 P = 4 a. Write down the equations for the IS and LM curves and calculate the equilibrium interest rate and level of income. (3 pts) b. Draw a well-labeled graph of the IS and LM curve from part (a) and label the equilibrium as A. (2 pts) c. Congress votes to cut taxes to T = 200. What is the new equilibrium interest rate and level of income? Draw a graph that depicts the new equilibrium on the same graph as part (b) as B. (5 pts) d. Assume the economy was in long-run equilibrium in part (b). After the tax cuts in part (c), the government wants the economy to transition to its new long-run equilibrium without any fiscal or monetary policy. What is the new long-run equilibrium r, Y, and P? Depict this equilibrium on the same graph as part (b) C. Describe intuitively (and briefly) how we get from point B to C. (8 pts) e. Go back to the equilibrium in part (c). What action (calculate a specific number) must the Fed take in order to restore the level of Y in part (b)? Why would the Fed prefer this equilibrium over the equilibrium in part (d)? (7 pts) An economy is initially described by the following equations C = 500 +0.50(Y-T) 1 = 500-25r d =Y - 25r G = 100 T = 500 M = 2000 P = 4 a. Write down the equations for the IS and LM curves and calculate the equilibrium interest rate and level of income. (3 pts) b. Draw a well-labeled graph of the IS and LM curve from part (a) and label the equilibrium as A. (2 pts) c. Congress votes to cut taxes to T = 200. What is the new equilibrium interest rate and level of income? Draw a graph that depicts the new equilibrium on the same graph as part (b) as B. (5 pts) d. Assume the economy was in long-run equilibrium in part (b). After the tax cuts in part (c), the government wants the economy to transition to its new long-run equilibrium without any fiscal or monetary policy. What is the new long-run equilibrium r, Y, and P? Depict this equilibrium on the same graph as part (b) C. Describe intuitively (and briefly) how we get from point B to C. (8 pts) e. Go back to the equilibrium in part (c). What action (calculate a specific number) must the Fed take in order to restore the level of Y in part (b)? Why would the Fed prefer this equilibrium over the equilibrium in part (d)? (7 pts)