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Question
Consider the following closed-economy, IS-LM model.
consumption function: C = 300 + 0.50(Y - T).
investment function: I = 500 - 2,000r + 0.25Y
Government purchases and taxes: G = T = 400
money demand function: (M/P)d = 0.4Y - 2500r
money supply: M = 2,060,
price level: P = 2.
1. Find the equation for the IS curve and the LM curve. Find the equilibrium interest rate r and the equilibrium level of income Y.
2. Suppose that government purchases are raised from 400 to 500. How much does the IS curve shift horizontally? What are the new equilibrium interest rate and level of income?
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