3. Consider the following economy.

Desired consumption ( ) = + − − C Y T r 200 0.4 400 . d Desired investment = − I r 300 400 . d Real money demand = − L Y i 0.6 400.

Full-employment output = Y 900.

Expected inflation π =0. e

a. Suppose that = = T G 175 and that = M 11,165.

Find an equation describing the IS curve. Find an equation describing the LM curve. Finally, find an equation for the aggregate demand curve. What are the equilibrium values of output, consump tion, investment, the real interest rate, and the price level? Assume that there are no mispercep tions about the price level.

b. Suppose that = = T G 240 and that = M 11,165.

What is the equation for the aggregate demand curve now? What are the equilibrium values of output, consumption, investment, the real inter est rate, and the price level? Assume that full employment output, Y, is fixed.

c. Repeat part ( ) b for = = T G 175 and = M 13,195.