What are new equilibrium interest rate and level of income

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Reference no: EM13234741

Consider the economy of Hicksonia.

A. The consumption function is given by C = 200 + 0.75(Y-T)

Investment function is I = 200 - 25r

Government purchases and taxes are both 100. For this economy, graph the IS curve for r ranging from 0 to 8.

B. The money demand function in Hicksonia is (M/P)^d = Y - 100r

The money supply M is 1000 and the price level P is 2. For this economy, graph the LM curve for r ranging from 0 to 8

C. Find the equilibrium interest rate r and the equilibrium level of income Y.

D. Suppose the government purchases are raised from 100 to 150. How much does the IS curve shift? What are the new equilibrium interest rate and level of income?

E. Suppose instead that the money supply is raised from 1000 to 1200. How much does the LM curve shift? What are the new equilibrium interest rate and level of income?

F. With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rate and level of inome?

G. Derive and graph an equation for the aggregate demand curve if fiscal or monetary policy changes, as in parts (d) and (e)?

Reference no: EM13234741

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