Assume that M = 500, P = 10 and e = 0.02. a) Derive the IS Curve for this economy. Plot it on a diagram with Y on the horizontal axis and r on the vertical axis.

3. The IS-LM-FE Model. Consider a closed economy where desired consump- tion is given by: 0'1 = 100 + 0.6Y 1000:- Desired investment is described by: Id = 50 iooor Government purchases are equal to G = 200. The liquidity function is: L(Y, v2) = 100 + 021' 25006 Assume that M = 500, P = 10 and 71'" = 0.02. a) b) C) Derive the IS Curve for this economy. Plot it on a diagram with Y on the horizontal axis and r on the vertical axis. Derive the LM curve. Plot on your diagram from part a). Solve for the equilibrium levels of *r and Y in this economy. What must full employment output be in order for this to be a general equilibrium? Plot the FE curve on your graph and label the equilibrium. Show the effects of an expansionary scal policy by deriving the IS Curve in the case where G" = 300. Plot it on your graph. What are the new levels for r and Y? Is the economy in a long run equilibrium? What is another example of a factor that may shift the IS Curve other than scal policy? Be sure to note the direction the IS Curve will shift. Show the eifects of a contractionary monetary policy by deriving the LM Curve in the case where M' = 50. Plot it on your graph. What are the new levels for r and Y? What is another example of a factor that may shift the LM Curve other than the nominal money supply? Be sure to note the direction the LM Curve will shift. In this question, work with the original IS curve from part a)