Question: Desired consumption is Cd = 1 0 0 + 0 . 8 Y - 5 0 0 r - 0 . 5 G , and
Desired consumption is Cd Y r G and desired investment is Id r Real money
demand is MdP Y i Other variables are e G and M
a Derive the IS and LM curve.
b Find the equilibrium values of the real interest rate, consumption, investment, and the price level.
c Suppose the money supply increases to Find the equilibrium values of the real interest rate,
consumption, investment, and the price level. Assume that the expected inflation rate is unchanged.
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