Consider an economy with consumption given by C = 300 + 0.6Y D ,
where Y D is disposable income. The income tax is T = 0.2Y . Investment
are described by I = 200 + 0.2Y ? 1000i. Government spending is G = 200.
The money demand follows MD/P = 0.5Y ? 2500i and real supply is fixed
MS/P = 500.
a. Find an equation for the IS curve.
b. Find an equation for the LM curve.
c. Solve for equilibrium output Y and the equilibrium interest rate i. Depict the IS/LM model.
d. Solve for the equilibrium levels of consumption C and investment I.
e. Now assume that the government decides to increase the tax rate?to
60%, calculate what happens to the equilibrium values ofY, i, CandI.
f. Setting all variables back to their original levels, calculate the
new equilibrium values for Y, i, C and I if the Central Bank increased
the money supply from 500 to 600.