In a closed economy, prices are constant/fixed. Behaviour is characterised by the following relationships. C=0.9375 (Y-T), T=10

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In a closed economy, prices are constant/fixed. Behaviour is characterised by the following relationships.

C=0.9375 (Y-T), T=10 and I=50-250i Money demand Md=Y-100i The supply of money and government expenditure are denoted by Ms and G respectively.

1) Determine the equation of the IS curve and the equation of the LM curve and explain their economic significance. 2) Calculate Y* and I* of the ISLM model for Md=40 and G=10. 3) Calculate the effect of an increase in the money supply on real income, the interest rate and investment. 4) Explain economically the transmission mechanism of a change in the money supply on real variables.

Now consider that the government increases demand to stimulate economic activity G=10 5) Analyse the effects of this policy on Y* and i* depending on whether the increase in the budget deficit is financed by the taxes ( 6) Define the crowding out effect and measure its importance in the context of the different policies