Question: Based on the information below, answer the following equations: Transactions money demand: Mt = 30 + 0.25Y Precautionary money demand: Mp = 20 + 0.05Y

Based on the information below, answer the following equations: Transactions money demand: Mt = 30 + 0.25Y

Precautionary money demand: Mp = 20 + 0.05Y

Speculative money demand: Msp = 80 - 200i

Consumption: C = 130 + 0.90Yd

Taxation: T = 40 Investment: I = 50 - 200i

Government expenditures: G = 60

Exports, X = 120

Imports, M = 20 + 0.22Y

In addition to the above, the government imposes a 15% tax rate, and the monetary authorities hold money supply at 300

a. Derive the IS and LM equations.

b. Calculate the equilibrium income, interest rate and investment.

c. If government expenditures increases 20, calculate the new equilibrium income, interest rate and investment

d. Is there crowding out? Explain

e. How can the problem in part (d) be resolved? Explain

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