Question: Consumption function: C = 12 + 0.6(YD) Government spending: G = 20 Investment function: I= 25 -50r Tax collections: T=20 Domestic price level: P =

Consumption function: C = 12 + 0.6(YD) Government spending: G = 20 Investment function: I= 25 -50r Tax collections: T=20 Domestic price level: P = 2 Nominal money supply: MS = 360 Real Money Demand: L(r,Y)=2Y-200r Production function: Y=N Labor supply: N=100

(a) Find an expression for the IS curve.

(b) Find an expression for the LM curve.

(c)Find the short-run equilibrium interest rate and output. Represent your results in a graph.

(d) Find an expression for the Aggregate Demand (AD) function.

(e) Find an expression for the Long Run Aggregate Supply (LRAS) function.

(f) What are the long run equilibrium values for output, interest rates and prices?

(g) Depict (a)-(e) on the IS-LM and AD-LRAS-SRAS diagrams.

(h)Suppose the Federal Reserve Bank (the Fed) decides to raise interest rates to 0.14 (14%). What level of nominal money supply will achieve the Fed's target in the short run?

(i) Find the new short run equilibrium for the economy.

(j) Find the long run equilibrium values for output, interest rates and prices.

(k) Start with the graphs in 1(f). Using the IS-LM and AD-LRAS-SRAS diagrams, carefully describe the adjustments that occur as the economy moves first to its short run and then to its long run equilibrium.

(l) Is monetary policy effective at achieving long run decreases in the level of output?

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