1. In the Keynesian cross model, assume that the consumption function is given by

C = 120 + 0.8 (Y - T)

Planned investment is 200; government purchases and taxes are both 400.

a) Graph planned expenditure as a function of income.

b) What is the equilibrium level of income?

c) If government purchases increase to 420, what is the new equilibrium income? What is the multiplier for government purchases?

d) What level of government purchases is needed to achieve an income of 2,400? (Taxes remain at 400.)

e) What level of taxes is needed to achieve an income of 2,400? (Government purchases remain at 400.)

2. Suppose that the money demand an economy.Function is

(M/P)d =800 - 50r

where r is the interest rate in percent.

The money supply M is 2,000 and the price level P is fixed at 5.

a) Graph the supply and demand for real money balances.

b) What is the equilibrium interest rate?

c) What happens to the equilibrium interest rate if the supply of money is reduced from 2,000 to 1,500?

d) If the central bank wants the interest rate to be 4 percent, what money supply should it set?

3. The following equations describe

Y =C + I + G.

C = 50+0.75 (Y - T ).

I = 150 - 10 r.

(M/P)d =Y -50r.

G = 250.

T = 200.

M = 3,000.

P = 4.

a) Identify each of the variables and briefly explain their meaning.

b) From the above list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph.

c) From the above list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b).

d) What are the equilibrium level of income and the equilibrium interest rate?