Consider the following IS - LM model: (21 marks)

C = 200 + 0.25Y_D;

I = 150 + 0:25Y - 1000i

G = 250;

T = 200;

(M/P)^d = 2Y - 8000i

(M/P) = 1600

1. Derive the equation for the IS curve (Hint: You want an equation with Y on the left-hand side and all else on the right).
2. Derive the equation for the LM curve
3. Solve for equilibrium real output
4. Solve for the equilibrium interest rate
5. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding up C, I and G.
6. Now, suppose that money supply increases to M/P = 1840. Solve for Y , i, C and I, and explain in words the effects of expansionary monetary policy.
7. Set M/P equal to the initial value of 1600. Now suppose government spending increases to G = 400. Summarize the effects of expansionary fiscal policy on Y , i and C.