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 Expected inflation - 8750(r + 1T e ). 1T e == 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 long-run 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 '1T e == 0.02.)