Question: Consider the following economy: Y=C+I+G C=200+0.5(Y-T) I=1000-20r G=T=400 d M P -Y-40r M' = 4000 M-M P = 2 (1) (2) (4) (5) (6)

Consider the following economy: Y=C+I+G C=200+0.5(Y-T) I=1000-20r G=T=400 d M P -Y-40r M' = 4000 M-M P = 2 (1) (2) (4) (5) (6) (7) (8) A1. Briefly explain the nature of the model. This should include: An explanation of equations 1, 2, 3, 5. - A discussion of the circumstances under which using this model is appropriate. A2. Derive the IS curve and briefly explain its meaning. A4. Find the equilibrium levels of Y and r. A3. Derive the LM curve and briefly explain its meaning. 6 marks 6 marks 6 marks 6 marks A5. What happens if there is a 10% contraction in the money supply, so that M = 3600? 6 marks

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