3. Consider the following Keynesian closed economy: Consumption C = 388 + 0.4(Y - T) - 600r. Investment I = 352 - 400r. Government purchases G = 280. Taxes T = 300. Full@employment output Y = 1400. Nominal money supply M = 12,600. Real money demand L = 1750 + 0.75Y -8750(r + pe ). Expected inflation pe = 0.02.

a. What is the equation of the IS curve?

b. Suppose that the price level is fixed at Psr = 7 in the short run. What is the equation of the LM curve in the short run, while the price level remains fixed?

c. What are the short-run equilibrium values of output, the real interest rate, consumption, and investment?

d. What are the long-run equilibrium values of output, the real interest rate, consumption, investment, and the price level?

e. What is the value of velocity in long-run equilibrium?

f. Suppose that the government wants to increase its purchases to G = 350 and to achieve a longrun equilibrium with investment, I, equal to 320, and the price level, P, equal to 6. What level of taxes, T, and money supply, M, will achieve this long-run equilibrium? The following questions will guide you to the answer. (1) What value of the real interest rate leads to I = 320? (2) What is the value of consumption in long-run equilibrium when I = 320 and G = 350? (3) What value of taxes, T, will lead to the level of consumption, C, in part (2), thereby achieving I = 320 and G = 350 in long-run equilibrium? (4) What value of the nominal money supply, M, will lead to a price level of 6 in long-run equilibrium with I = 320 and G = 350? (Note: continue to assume that pe = 0.02.)