Please answers those six questions(a to f) As i put 1500 points, please give me

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Please answers those six questions(a to f) As i put 1500 points, please give me the right and satisfied answers otherwise i wont rate. question) Suppose the economy can be described by the following equations: Y=C+I+G, I=400-10r, p=2, (M/P)^S=600, C=100+0.75(Y-T), T=G=500, (M/P)^D=0.2Y-20r a) Derive the LM curve for this economy b) Find the IS curve for this economy c) Find the equilibrium level of real GDP and the real interest rate. d) What are consumption and investment in this economy e) Suppose the government increases taxes by 10% (while keeping spending the same). How does this change your answers to c) f) to offset the tax increase, monetary policy increases the money supply by 10%. Does this completely offset the 10% tax increase or not? Show calculations and briefly explain.

Explanation / Answer

the LM curve shows a relation between the income level and rate of interest rate.......

each point on the LM curve give us the pair of Y and r at which there will be equillibrium in the money market.

by equillibrium in money market we mean demand of money in the market should be equal to supply of money in the market

now supply of money=(M/P)^S/p

thud m(s)=600/2=300

and demand of money=0.2Y-20r

thus on equating we get

20r+300=0.2Y

Y=100r+1500 thus this is the required LM curve... this is straight line with negatively sloped...

d>.for the is curve we have in gods market

Y=C+I+G

or Y=100+0.75(Y-500)+400-10r+500

or Y=2500-40r..this is the required is curve

c>.on taking the intersection of IS and LM curve we get

2500-40r=1500+100r

r=7.14%

and Y=2214.28$

d>.C=100+0.75(2214-500)

=1385.7$

I=400-10r

=328.6

e>.since the tax is increased this will shift the IS curve to left and we will get less GDP and r by 10%

f>. no it will not compensate completely..

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