Question: Desired consumption is Cd = 100 + 0.8 Y - 500 r - 0.5 G , and desired investment is Id = 100 - 500

Desired consumption is Cd= 100 + 0.8Y - 500r - 0.5G, and desired investment is Id= 100 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are e= 0.05, G = 200, = 1000, and M = 2100.

(a)Find the equilibrium values of the real interest rate, consumption, investment, and the price level.

(b)Suppose the money supply increases to 2800. 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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