1. IS-LM Model (25 points). Use the following information to build the IS-LM model. a.) The consumption function is given by C = 400 + 0.5(Y - 7). The investment function is I = 600 - 25r. Government spending and taxes are both 400. Solve for and graph the IS curve for this economy. Label the x- and y-axes with the proper variables. b.) The money demand function is (M/P) d = Y - 50r. The money supply M is 4,000 and the price level Pis 5. Solve for the LM curve and then plot it on your graph above. c.) Find the equilibrium interest rate r and the equilibrium level of income Y. Label the equilibrium values on your graph above. d.) Suppose that the money supply is lowered from 4,000 to 2,000. How does this affect the IS and LM curves? What is the new equilibrium interest rate and level of income? Show the effects of the fall in the money supply in your graph above. e.) Assume the money supply is back to 4,000. Suppose now that government spending is lowered from 400 to 200. How does this affect the IS and LM curves? What is the new equilibrium interest rate and level of income? On a new graph below, show the original IS and LM curves and the effects of the cut to government spending predicted by the model. f.) Assume the money supply is back to 4,000 and government spending is back to 400. Derive and graph an equation for the aggregate demand curve. What effect would the monetary policy change in part d.) have on the aggregate demand curve? What about the fiscal policy change in part e.)? (Note: you do not need to show the effects graphically. A brief written explanation is fine.)