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.