Question: Consider the following closed-economy, IS-LM model. consumption function: C = 300 + 0.50(Y - T) . investment function: I = 500 - 2,000r + 0.25Y

Consider the following closed-economy, IS-LM model.

consumption function: C = 300 + 0.50(Y - T).

investment function: I = 500 - 2,000r + 0.25Y

Government purchases and taxes: G = T = 400

money demand function: (M/P)d = 0.4Y - 2500r

money supply: M = 2,060,

price level: P = 2.

A. Find the equation for the IS curve and the LM curve. Find the equilibrium interest rate r and the equilibrium level of income Y.

B. Suppose that government purchases are raised from 400 to 500. How much does the IS curve shift horizontally? What are the new equilibrium interest rate and level of income?

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