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Econ 3040: Intermediate Macroeconomic TheoryHomework 3 SolutionProf. Karel MertensDue in lecture on 04/12/2016Question 1: IS-LM ModelPrelim 2, 2008Consider a closed economy where the consumption and investment functions are given by:C=200 + 0.75(Y-T)I=200-25rGovernment purchases G and taxes T are such thatG=T= 100. The real money demand functionis given by:Ld=Y-100rThe money supplyMis 1000 and the price levelPis 2.1. Derive an equation for the IS curve. (5 points)2. Derive an equation for the LM curve. (5 points)3. Find the general equilibrium values of the real interest raterand the incomeY. (5 points)1
4. Find the government-purchases multiplier and interpret your result. (5 points)