6. Consider the following economy: Desired consumption Desired investment Real money demand Expected inflation cd-1275 +0.5(Y-T)-200r -900-200r

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6. Consider the following economy: Desired consumption Desired investment Real money demand Expected inflation cd-1275 +0.5(Y-T)-200r -900-200r L=0.5Y - 2001 Full-employment output = 4600 1-0

a. Suppose that T=G=450 and that M=9000. Find an equation describing the IS curve. (Hint: Set desired national saving and desired investment equal, and solve for the relationship between rand Y, given P.) Finally, find an equation for the aggre- gate demand curve. (Hint: Use the IS and LM equations to find a relationship between Y and P.) What are the equilibrium values of output, con- sumption, investment, the real interest rate, and the price level?

b. Suppose that 7-G-450 and that M-4500. What is the equation for the aggregate demand curve now? What are the equilibrium values of output, consumption, investment, the real interest rate, and the price level? Assume that full-employment output is fixed.

c. Repeat part

(b) for T=G=330 and M = 9000.

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