1. 6. (Appendix 11.C ) Consider the following economy.

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Desiredconsumption Desiredinvestment Governmentpurchases Taxes Realmoneydemand Moneysupply Cd = 325+0.5(Y −T)−500r.

Id = 200−500r.

G = 150.

T = 150.

L = 0.5Y −1000r.

M = 6000.

Full-employmentoutput ¯¯¯

Y = 1000.

Note that the expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate.

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

b. What are the values of

αIS, βIS, αLM, βLM, and

ℓr for this economy? (You’ll have to refer back to Appendix 9.B for

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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, government purchases increase from suppose that to G=150 G=250.

What are the new values of equilibrium level of output?

αIS and the short-run

e. Use Eq. (11.C.5) to compute the government purchases

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multiplier. Use your answer to compute the short-run change in Y

resulting from an increase in government purchases from to G=150 G=250.

How does your answer here compare to your answer in part ( )?