Consider the following IS-LM model = + + , = 100 + 0.75( ), = 80 + 0.1 150, = 60, = 40, md= 3000, ms= 1000 a) Derive the IS curve. b) Derive the LM curve. c) Find the equilibrium interest rate and output. d) Assume the government adjusts taxes to eliminate the budget deficit. On a new graph, show the effects of this change on the model. Do not redo the algebra, simply show how the curves move as a result of the change. Show both the old and the new equilibrium levels of Y and i. What is the effect of the policy on equilibrium output and interest rate? Is this a fiscal expansion or contraction? e) What can the central bank do to offset the effect of the tax change on equilibrium output? How will the central bank intervene in the bond market to accomplish its goal? Using the IS-LM model, show the effects of the central bank's actions on a new graph that also includes all of the lines from your graph in part (d). What is the effect on equilibrium output and interest rate relative to part (d)? f) Now return to the original assumptions of the model, where G and T are fixed. The leaders of the government decide that they would like to increase investment in the economy. They institute successful policies - such as advertisements, speeches, etc. that increase the personal savings rate (i.e. lower the marginal propensity to consume.) At the same time, they ask the Fed to use monetary policy to lower interest rates. After these policies take effect, the government is surprised to find that output has not changed at all. Are you surprised? Why might the government want to encourage investment?