6. (Appendix 11.C) Suppose that the German economy can be simplified as follows:

Desired consumption Cd = 250 + 0.5(Y - T)

- 500r.

Desired investment Id = 700 - 500r.

Government purchases G = 1300.

Taxes T = 1300.

Real money demand L = 0.5Y - 1000r.

Money supply M = 6000.

Full-employment output Y = :3000 billion 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 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 = 1300 to G = 1500. 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 = 1300 to G = 1500. How does your answer here compare to your answer in part (d)?