Consider the IS-LM model with completely sticky goods prices in the SR closed economy. Supposethe consumption function is given byC=100+0.8*(Y-T)and the investment function is given byI=600-5000*r. G=800 and T=500.Money supplyM=25000and general price levelP=5. The real money demand function is given byL(i,Y)=0.2Y/i.=2% in the Fisher equation.

1. Derive the equations of the IS and LM curves and solvefor the equilibrium real output, real interest rate, consumption and investment spending.
2. Consider a one-time open market sales of bonds of 100 by the Bank of Canada(to a private bank). Suppose all private banks have the same reserve ratioof 4% and the general public's cash-to-deposit ratio is 0.

i. After all (infinite) rounds of "money creation/destruction", show the changes inthe balance sheetsof the private banking system, the Bank of Canada and the general public.By how much does the money supply increase/decrease?

ii. Use the IS-LM modelwith completely sticky goods pricesto graph the impact of such open market sales in the SR closed economy. How willequilibrium real output, real interest rate, consumption and investment spendingchange? Explain.(DO NOT solve numerically.)