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1. An economy is initially described by the following equations: C =5m) + I3.75(Y T) I :1, 000 5m M/P =Y 20! G :1, 000

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1. An economy is initially described by the following equations: C =5m) + I3.75(Y T) I :1, 000 5m M/P =Y 20! G :1, 000 T :1, 000 M :6, 000 P :2 a. Drive and graph the I S curve and the LM curve. Calculate the equilibrium interest rate and income. Label that point A on your graph. b. Suppose a newly elected president cuts taxes by 20%. Assuming that the money supply is held constant, what are the new equilibrium interest rate and income? What is the tax multiplier? c. Now assume that central bank adjust the money supply to hold the interest rate constant. What is the new equilibrium income? What must the new money supply be? What is the tax multiplier? d. Now assume that the central bank adjust the money supply to hold income constant. What is the new equilibrium interest rate?What must the money supply be? What is the tax multiplier

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