2. An economy is described as follows. Desired consumption Cd == 600 + 0.5(Y- T) - 50r. Desired investment I d == 450 - 50r. Real money demand L == 0.5Y - 100i. - Full-employment output Y == 2210. Expected inflation '[( == 0.05. In this economy the government always has a balanced budget, so T == G, where T is total taxes collected.

a. Suppose that M = 4320 and G = 150. Use the classical IS-LM model to find the equilibrium values of output, the real interest rate, the price level, consumption, and investment. (Hint: In the classical model, output always equals its full-employment level.)

b. The money supply rises to 4752. Repeat Part (a). Is money neutral?

c. With the money supply back at 4320, government purchases and taxes rise to 190. Repeat Part (a).

Assume for simplicity that Y is fixed (unaffected by G). Is fiscal policy neutral in this case? Explain.