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Question 1. In a closed economy, the consumption function is given by C = 200 +...

Question 1. In a closed economy, the consumption function is given by C = 200 + 0.75(Y-T). The investment function is I = 200 – 25r. Government purchases and taxes are both 100. The money demand function in the economy is (M/P)d = Y – 100r. The money supply M is 1,000 and the price level P is 2.

a. Derive the equations of IS and LM curves.

b. Find the equilibrium interest rate r and the equilibrium level of income Y, given the price is fixed. Graph the IS and LM curves and the equilibrium r and Y.

c. Derive an equation for the aggregate demand curve in this economy.

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Expert Solution

Rahul Sunny answered 1 year ago
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