6. (Appendix 11.C) Consider the following economy. Desired consumption Cd = 325 + 0.5(Y - T) -500r. Desired investment I d = 200 - 500r. Government purchases G = 150. Taxes T = 150. Real money demand L = 0.5Y - 1000r. Money supply M = 6000. Full@employment output Y = 1000.

a. Calculate the full-employment values of the real interest rate, the price level, consumption, and investment.

b. What are the values of aIS, bIS, aLM, bLM, and /r for this economy? (You’ll have to refer back to Appendix 9.B for definitions of these coefficients.)

c. Suppose that the price level is fixed at Psr = 15. What are the short-run equilibrium values of output and the real interest rate?

d. With the price level still fixed at Psr = 15, suppose that government purchases increase from G = 150 to G = 250. What are the new values of aIS and the short-run equilibrium level of output?

e. Use Eq. (11.C.5) to compute the government purchases multiplier. Use your answer to compute the short-run change in Y resulting from an increase in government purchases from G = 150 to G = 250. How does your answer here compare to your answer in Part (d)?