Consider the following IS-LM model: I = 200 + 0.20Y 1000i G = 200 T = 100 L(i, Y) = 2Y 8000i Ms /P = 2000 (a) (2 marks) Assume consumption function
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# Consider the following IS-LM model: I = 200 + 0.20Y − 1000i G = 200 T = 100 L(i, Y) = 2Y − 8000i Ms /P = 2000

(a) (2 marks) Assume consumption function is linear, the marginal propensity to consume is 0.6 and the consumption when the the disposable income is zero is 200. What is the consumption function?

(b) (5 marks) Derive the equation for the IS curve. Explain the meaning of the IS curve. resents

(c) (5 marks) Derive the equation for the LM curve. Explain the meaning of the LM curve. (

d) (2 marks) Solve for equilibrium real output and interest rate.

(e) (3 mark) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding up C, I, and G.

(f) (2 marks) Solve for the level of private saving when both the goods and the financial market are in equilibrium.

(g) (3 marks) Now assume the central bank engages in expansionary monetary policy by increasing the money supply to Ms/P = 2500. Solve for the new equilibrium values of Y, i, C, and I.

(h) Explain in words the effects of the above expansionary monetary policy in (f), and then draw a graph to Illustrate your answer.

(i) Now assume the economy is back to its initial equilibrium where Ms/P = 2000 and the interest rate is at the central bank's target level. Assume the central bank is planning to maintain the same target interest rate level and the government tax increases to T = 200. Summarize the effects of the fiscal policy on Y, i, and C.

(j) Explain in words the effects of the above fiscal policy in (h), and then draw a graph to illustrate your answer.

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